US President Trump has nominated a candidate for Federal Reserve chair. It turned out to be Kevin Warsh, who previously served on the FOMC from 2006 to 2011 — precisely the period when the economic crisis unfolded. His first stint on the Fed was relatively brief because Warsh criticized large?scale asset purchases and near?zero interest rates, arguing that excessive stimulus sows the seeds of future crises.

The market reacted violently to Warsh's nomination. The dollar strengthened notably, and precious metals markets went into a frenzy: gold's two?day slump was more than 16% from the peak. Besides, silver, platinum, and palladium all plunged at an extraordinary speed.

Japan's Prime Minister Takaichi poured fuel on the fire on Saturday by saying she sees nothing wrong with a weaker yen because it benefits Japan's budget. That statement directly contradicted the Finance Ministry's stance, which wants to curb the currency's fall. The yen depreciated accordingly, which further boosted the dollar.

Dollar strength runs counter to global positioning trends. According to the latest CFTC report, the aggregate dollar position rose over the week by a hefty $7.7 billion to ?$8.0 billion. After a brief two?week pause, investors again sold the dollar quite actively.

It's unclear how Trump will secure Warsh's loyalty. Trump demanded from Powell exactly the same that Warsh has historically supported: rate cuts on the assumption that inflation has already been defeated. But is that the case? On Friday, the US producer price report for December surprised to the upside: against a forecast of 2.7%, the PPI climbed 3.0% year?on?year (the core index rose from 3.0% to 3.3% y/y). This is only producer prices, which have been going up partly because external competition is dampened via high tariffs, i.e., prices are rising in a favorable domestic environment.

Another indicator of real inflation expectations in the business sector. The 5?year TIPS breakeven grew to 2.53% as of February 1, matching the July high. It looks likely that the January CPI report could also surprise the market with higher-than-expected readings.

The futures market has not yet reacted; it still prices in two Fed rate cuts in June and September. These may be isolated blips that do not change the overall picture. But if inflation is indeed resurfacing, the Federal Reserve will not be able to cut interest rates and may be forced to raise them or at least keep them unchanged until the situation clarifies.

We expect high volatility in the coming days as the market decides which trend will prevail. If the dollar begins a bullish wave, that will reduce risk appetite, equity indices will enter a deep correction, and the inflation outlook will be highly uncertain. Signs that inflation is not defeated globally are increasing; if that is the case, the dollar is likely to be the main beneficiary. That was the case in 2022, when inflation unnerved major central banks and the dollar dominated global FX markets. However, that was before Trump's return. At that time, US GDP growth in the last two quarters of 2021 exceeded 5%. The situation now is fundamentally different.

For now we assume the dollar remains under pressure at least until the release of the January CPI report. There is no solid case for a sustained dollar rally; what we are seeing in markets is largely the deflation of an obvious precious?metals bubble. Whether the equity bubble, inflated by elevated expectations around AI adoption, will also deflate is still unclear; equities still have some resilience. As long as equity indices hold, the US dollar will likely remain weak.