U.S. Dollar seen weaker as BofA survey cites 'Warsh trade'

Why investors expect the Warsh trade to weaken the dollar

The “Warsh trade” is investor shorthand for a scenario in which Kevin Warsh’s prospective leadership at the Federal Reserve coincides with a softer U.S. dollar even as Treasury yields edge higher. As reported by The Wall Street Journal, the nomination is seen as a setup that could bring higher U.S. Treasury yields alongside a lower dollar, a combination that helps explain recent positioning around U.S. assets.

Mechanically, investors are weighing the possibility of earlier or more frequent rate cuts alongside reduced reliance on forward guidance, while also reassessing perceptions of Fed independence. In that mix, the currency can weaken on easier policy expectations and diminished safe‑haven appeal, even as a higher term premium and policy uncertainty lift longer‑dated yields.

BofA fund manager survey: weaker dollar, risk of higher yields

According to the Financial Times, roughly 60% of fund managers in Bank of America’s latest survey expect the U.S. dollar to weaken if Warsh becomes Fed Chair, and about 38% see that dollar softness occurring alongside higher U.S. government borrowing costs; the survey also finds dollar sentiment the most pessimistic in more than a decade. Taken together, the data point to an investor base that is preparing for a currency downtrend even as bond markets price lingering inflation risks and a fatter term premium.

In practice, this stance acknowledges that easing expectations do not automatically translate into lower long‑term yields. If investors demand more compensation for policy uncertainty and fiscal dynamics, the curve’s long end can bear steeper risk premiums even while the policy rate eventually moves lower.

Immediate market implications: dollar-yield decoupling and policy volatility

A key implication is the potential decoupling between the dollar and yields. Traditionally, higher U.S. yields draw in capital and support the currency; under the Warsh trade, the currency side can lag if policy signaling weakens the dollar’s perceived safety while the long end cheapens on a higher term premium.

Policy volatility is another transmission channel. If markets anticipate less predictable forward guidance and greater sensitivity to political signals, pricing can shift faster across FX and rates, widen bid‑ask spreads, and elevate realized volatility. In that backdrop, dollar moves may be driven more by risk premia than by relative interest‑rate differentials alone.

Investor behavior across borders could also adjust. A persistently softer dollar tends to erode foreign‑currency returns on Treasuries, and, if hedging costs remain elevated, some overseas buyers may trim duration or reduce unhedged exposure, reinforcing pressure at the long end.

Institutional reactions: Nomura, PIMCO, MUFG, Société Générale

Nomura cautions that the policy mix under a Warsh‑led Fed could challenge market assumptions about the dollar’s resilience and the rates/FX linkage. As Dominic Bunning put it, the Fed could become “increasingly unorthodox,” a shift he argues would undermine confidence in the dollar’s strength by elevating political‑risk premia in FX and rates.

PIMCO, via commentary from Global Economic Advisor Richard Clarida, has flagged the possibility of two to three rate cuts in 2026 while emphasizing a more cautious approach to forward guidance, a combination that could keep the dollar on the back foot if markets foreground the easing path over incremental inflation progress.

MUFG Research notes that Warsh’s reputation for balance‑sheet vigilance may coexist with a softer tone on inflation, and its base case includes multiple rate cuts this year, an expectation that, if realized, would be consistent with a weaker dollar despite intermittent spikes in yields tied to term‑premium dynamics.

Société Générale highlights the risk that a renewed focus on balance‑sheet normalization and inflation discipline could lift risk premiums at the long end of the Treasury curve. In such a scenario, financial conditions might tighten even as policy rates drift lower, reinforcing the thesis of dollar‑yield decoupling under the Warsh trade.