Dollar's "Tactical Rebound" Can Extend: Strategists

Economic

Summary:

"A tactical window for a USD rebound" - Danske Bank.

Foreign exchange strategists remain overall bearish on the dollar's prospects for this year, but a window is opening for a near-term rebound.

Analysts at several institutions we follow identify potential for a USD comeback, with Danske Bank analysts saying in a new strategy note released midweek that a "tactical window for a USD rebound" has opened.

"Given that the recent move lower in the dollar has been driven more by a political risk premium – stemming from unpredictable US policy – than by fundamentals, one could argue that an easing of short-term political uncertainty may restore some correlation with fundamentals and open a tactical window for a USD rebound," say analysts in a new note.

The dollar surprised investors by falling out of bed at the start of 2026, dropping 1.15% in January. That in itself is unremarkable; however, the bulk of those declines were squeezed into a couple of days towards the end of the month, raising fears of a destabilising selloff.

"The main development over January was the dollar’s slide to new multi-year lows, which broke price out of the sideways range it had sat in since early summer," says Nick Kennedy, FX strategist at Lloyds Bank. "But the pullback from that break has been equally sharp."

The recovery was sparked by a combination of developments:

1) The USD/JPY selloff that had whiffs of intervention overextended itself2) Treasury Secretary Bessent warned that he was not comfortable with the dollar's rapid decline3) U.S. President Donald Trump nominated Kevin Warsh for Chair of the Federal Reserve, which markets saw as a vanilla pick.

"Speculative USD positioning is already short, and hedging costs in the options market remain extreme. Moreover, Trump’s selection of Warsh as the next Fed Chair appears likely to reduce concerns around threats to Fed independence at this juncture," says Danske Bank.

Dollar's "Tactical Rebound" Can Extend: Strategists_1

Kennedy says USD selloffs tend to be followed by decent rebounds; "that’s actually been a consistent feature of this dollar cycle."

"A few weeks of USD outperformance" are in the offing, he adds.

"The catalyst for that this time was the violent correction in precious metals, followed by Trump’s announcement Kevin Warsh would be his Fed Chair pick. Warsh, with his more hawkish track record, was seen as the 'credible' choice and a sign Fed independence was not at risk," says Kennedy.

The dollar index has rebounded to 97.46 from 95.55, pressuring GBP/USD to 1.37 from 1.3868. EUR/USD is back at 1.18 having been as high as 1.2050.

Source: Poundsterlinglive

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