Currency markets were largely on hold on Wednesday as traders digested a series of political and policy developments that left the U.S. dollar broadly steady and the Japanese yen searching for direction.
The dollar's stability came as investors processed President Donald Trump's nomination of Kevin Warsh for Federal Reserve chair and assessed how that selection might influence the path of U.S. interest rates. Market participants have been pricing in the probability that Warsh would be less likely to press for rapid rate reductions, a dynamic that has lent some firmness to the greenback.
Observers noted the nomination also eased some market anxieties about the Fed's institutional independence after ongoing criticism from the president toward the central bank and its current chair, Jerome Powell. At the same time, strategists from MFS Investment Management described Warsh as pragmatic on rate policy. They said that if Warsh implements balance sheet reduction at some point, that action could pressure long-term yields upward even as his appointment might reduce the inflation risk premium.
Domestic U.S. politics also influenced market flows. President Trump signed a spending bill late on Tuesday, ending a four-day partial government shutdown. The deal removed a degree of fiscal uncertainty, though the shutdown will delay the release of key employment data that had been scheduled for Friday.
Euro, sterling and the dollar index
The euro traded at $1.1814 in early Asian hours, while sterling held at $1.3693 as investors awaited policy decisions from the European Central Bank and the Bank of England, both due on Thursday. Expectations were that neither central bank would change policy rates at their upcoming meetings.
The dollar index - which tracks the greenback versus six major currencies - was at 97.43, close to the one-week peak of 97.73 reached on Monday. The index has bounced back from a 1% decline in January, following a larger 9.4% fall last year.
Yen volatility and Japan's national election
The yen edged weaker to 156.06 per dollar on Wednesday, moving nearer to its weakest level since January 23. On that date, the currency had strengthened sharply from 159.23 amid market speculation that the New York Federal Reserve was conducting rate checks - a development that raised talk of potential intervention in the yen market.
Talk of coordinated U.S.-Japan intervention has broadly kept the yen from sliding further, but the currency remains sensitive to political developments in Tokyo. A national election scheduled for the coming weekend has put the yen's near-term path into question as Prime Minister Sanae Takaichi campaigns on a platform that includes higher spending, tax cuts and a security strategy tied to faster defence build-up.
Commonwealth Bank of Australia's currency strategist Carol Kong warned that a strong result for the ruling Liberal Democratic Party could embolden plans for budget stimulus, which in turn could raise concerns about a larger government debt burden and exert downward pressure on both Japanese government bonds and the yen.
Earlier in the campaign, remarks by Takaichi that emphasized the benefits of a weaker currency prompted a selloff in the yen. Although she subsequently dialed back those comments, market participants remain wary that mixed signals from the prime minister could complicate efforts to support the currency.
Other FX moves and central bank cues
The Australian dollar traded around $0.7028 after rallying about 1% in the prior session, a move driven by the Reserve Bank of Australia's decision to raise interest rates and market bets that additional tightening may be necessary later in the year. The New Zealand dollar slipped to about $0.604.
Across markets, investors are balancing monetary policy expectations, geopolitical and political developments, and shifts in risk sentiment - with central bank announcements and national elections among the key near-term variables.
What are the best investment opportunities in 2026? The best investments start with better data. Going with your gut has its place, but when excitement masquerades as intuition, it can lead to costly mistakes - or analysis paralysis. InvestingPro+ combines institutional-grade data with AI-powered insights that you don't need a finance PhD to understand. It won't guarantee winners, but it will certainly help you find more of them, more often. So what are the best investments of 2026 so far? Ask WarrenAI, then decide.