Gold and Bitcoin have plunged, the dollar is staging a strong comeback! The rapid retreat of "devaluation trading" has become a core catalyst for Powell's control of the Federal Reserve.

Gold and Bitcoin collectively weakened, the US dollar launched a strong counterattack, and the "devaluation trade" that has been popular in the market for two years is falling apart. The source of all these changes can be traced back to January 30, when U.S. President Donald Trump nominated Kevin Warsh as the Chairman of the Federal Reserve. Warsh's nomination prompted investors to re-evaluate popular macro strategies centered on diversifying investments and reducing dependence on the U.S. dollar. On that day, the price of gold plummeted by 13% from its historical high, marking the largest decline in over forty years, followed by a sharp decline in Bitcoin. The US dollar rebounded after a long period of decline. Although Warsh was favored by Trump for advocating lower interest rates, his previous hawkish stance left a deep impression on many investors. This conflicting label made it difficult for investors to determine his policy orientation after taking office, and after the nomination news broke, some investors adopted hedging strategies. The market situation further escalated last week. Warsh, as the Chairman of the Federal Reserve, presided over the first interest rate meeting and emphasized that price stability is a top priority. This statement dispelled market concerns, as investors had been worried that Warsh would cater to the White House's calls for interest rate cuts. Gavin Davies, Co-Founder and Chairman of Fulcrum Asset Management and former Chief Economist of Goldman Sachs, stated: "If anyone thinks Warsh is just a puppet at the Federal Reserve, ignoring inflation and cutting interest rates blindly, they will be sorely disappointed. He is definitely not the type of Federal Reserve Chairman." Since Warsh was nominated as the Chairman of the Federal Reserve, the "devaluation trade" has subsided. This so-called devaluation trade refers to a strategy of holding assets such as gold and Bitcoin to avoid currencies that are vulnerable to inflation, fiscal and monetary policy influences. This strategy has been one of the main narratives in the market over the past two years. The surge in U.S. government debt and inflation consistently above policy targets over the past five and a half years have intensified concerns about the declining purchasing power of the U.S. dollar. "People are concerned about the inflation target, the credibility and independence of the Federal Reserve," said Jonathan Owen, Portfolio Manager at TwentyFour Asset Management. "I think these concerns have been largely eased." Currently, traders have fully priced in two interest rate hikes by the Federal Reserve in the first quarter of 2027, whereas before the interest rate meeting last week, the market only expected one hike. Warsh's statements further boosted the US dollar and bolstered long-term U.S. Treasury prices sensitive to inflation, while gold and cryptocurrencies were impacted. The US dollar had already benefited from a renewed confidence in the U.S. exceptionalism. Massive investments related to artificial intelligence and America's relatively advantageous energy position have strengthened the attractiveness of the US dollar compared to currencies of energy-importing countries in Europe and Asia. The stability of the U.S. job market has also supported the US dollar. After the interest rate meeting last week, JPMorgan Chase raised its expectations for the US dollar against the euro and recommended going long on the US dollar against a basket of low-yield currencies, including the Swiss franc and the New Zealand dollar. Mira Chandran, Co-Head of Global FX Strategy at JPMorgan Chase, said: "As long as the Federal Reserve continues to lean towards raising interest rates, the logic behind the devaluation trade is essentially ineffective." In the currency options market, demand for hedging against a continued appreciation of the US dollar relative to traditional safe-haven currencies such as the Swiss franc has risen to the highest level since 2022. On one hand, Warsh has promised to reshape the Federal Reserve's credibility against inflation, while on the other hand, he has called for a "policy paradigm shift," to comprehensively restructure the Federal Reserve's policy-making, communication mechanisms, and balance sheet management framework. This new rhetoric has pushed up the yield on inflation-adjusted 10-year U.S. Treasuries to 2.28%, the highest in over a year. The glory days of gold are over. As real yields rise, it increases the opportunity cost of holding non-yielding assets like gold and Bitcoin, suppressing their price performance. Due to cautious market outlook on U.S. monetary policy prospects, physical gold investment demand has simultaneously shrunk. Deutsche Bank significantly lowered its gold price expectations, with a decrease of up to 22%. Similarly, Goldman Sachs lowered its year-end gold price forecast by $500 per ounce last week, to $4900 per ounce. As of this month, the outflow of funds from the world's largest gold ETFSPDR Gold ETFhas approached nearly $1 billion. Since the end of February, the cumulative outflow from the fund has reached $12 billion, marking the largest withdrawal record in four months since 2013. The underlying logic of the devaluation trade does not solely rely on monetary policy. Concerns about government borrowing and debt sustainability are still present in the market. Despite U.S. Treasury Secretary Scott Bennett's commitment to halving the budget deficit before the end of Trump's term, the current U.S. budget deficit is still close to 6% of the GDP. In the UK, investors also have concerns: if the government continues to borrow to expand spending, the already fragile public finances will come under further pressure. Japanese government spending is also a cause for concern among investors. These factors have driven the price of gold to soar more than 175% in the two years leading up to January of this year, and have also spurred demand for alternative value reserve assets. Billionaires Ray Dalio and Ken Griffin believe that gold may ultimately be safer than the US dollar and have warned that the trend in U.S. debt may lead to future financial crises. Parish Uppadaya, a strategist at Vanguard Investments, has now turned bullish on the US dollar. He explained: "The devaluation trade is a medium- to long-term structural logic, but at the moment, cyclical factors will override the devaluation theme." Currently, investors seem more focused on the Federal Reserve's policy bias towards controlling inflation. JPMorgan Chase estimates that investors' allocation to the devaluation trade (primarily in gold and Bitcoin) has fallen back to levels seen in March 2025, when concerns about inflation and policy credibility were not as prevalent due to Trump's tariff policies. Chandran from JPMorgan Chase stated: "The devaluation trade is gradually disappearing."