Investors expect ‘Warsh trade’ to weaken dollar, BofA survey shows

A majority of big investors expect Kevin Warsh’s appointment to lead the Federal Reserve will cause the dollar to weaken further, in a sign of lingering concerns over the independence of the US central bank.

Nearly 60 per cent of fund managers said that Donald Trump’s nomination of Warsh as Fed chair would hurt the US currency, according to a closely watched survey of fund managers by Bank of America. Just a quarter said a stronger dollar was part of the “Kevin Warsh trade”.

The dollar briefly rallied at the end of January after Trump selected Warsh to succeed Jay Powell, with the choice of the former Fed governor assuaging some investors’ fears of an overly dovish chair who would comply with Trump’s repeated calls to cut interest rates.

However, the dollar bounce was shortlived, and the currency remains 1.2 per cent lower so far this year against a basket of its peers, adding to a more than 9 per cent drop in 2025. Investors have said that concerns about erratic US policymaking — for example, Trump’s tariff threats over Greenland — are weighing the currency down.

A separate BofA survey on Friday showed that fund managers are taking the most bearish stance on the dollar in more than a decade.

“The Fed behaving in a much less independent way is a risk that we think people are not paying much attention to,” said Dominic Bunning, head of G10 FX Strategy at Nomura, adding that an “increasingly unorthodox reaction function from the Federal Reserve . . . really does undermine the dollar.”

The BofA survey showed that 38 per cent of fund managers think Warsh’s nomination will lead to higher US government borrowing costs alongside a weaker dollar. That combination suggests investors worry that the Fed could deliver rate cuts that are not justified by the economic outlook, leading to higher long-term inflation expectations.

Just over a fifth of fund managers expect a weaker dollar to accompany lower US Treasury yields.

Government borrowing costs and the value of the currency have tended to move in the same direction in recent years, as higher bond yields usually signal a stronger economy, thus attracting inflows of foreign capital.

That relationship began to break down last year, with yields and the dollar value being driven more by perceived political risk emanating from the US.

“The dollar’s behaviour has changed,” said Bunning. “When volatility picks up, the dollar weakens. That’s a reflection of [the fact that] volatility is coming out of the US.”

Long-dated US Treasury yields rose following the news of Warsh’s nomination in January, with investors citing his desire to shrink the central bank’s balance.

More than half of the investors polled — the highest proportion ever — also said they are expecting “no landing” in the global economy; in other words, they are not expecting inflation to return to target after many years of higher prices.