MUFG Research discusses this week's Kevin Warsh nomination hearing to the Senate Banking Committee.

"There are two elements to this theme that could serve to undermine the dollar. The first relates to the how the transition from one Fed Chair to the next plays out. CNN reported last Wednesday that Thom Tillis still plans to block his nomination until the criminal investigation into Chair Powell is dropped. President Trump has stated that he will not drop the case. A probable delay to confirmation would see Fed Chair Powell extend his time. President Trump has threatened to then fire Powell. We can all see the potential for that process to go badly," MUFG notes.

The second relates to whether the markets’ confidence in Kevin Warsh being a truly independent Fed Chair will be doubted. The hearing tomorrow will be important in that regard. Trump has openly said that he wanted a Fed Chair who would cut rates. Warsh now argues that strong productivity growth will allow for easier policy without fuelling inflation. The more Warsh is seen pushing those views tomorrow, the more investors will doubt his independence. This could be one of the big negative risks for the dollar over the coming year if the Fed cuts rates and inflation remains above target, which seems likely for most of the next year," MUFG adds.