The new Federal Reserve leader will steer the ship; can the strong dollar hold until mid-year?

Candidate Selection Race: Wash the Favorite, Market Bets on Independence

Trump is expected to announce his choice for the new Federal Reserve Chair in the first week of January, with the official transition taking place in May to succeed Powell. Among the candidates, former Fed Governor Wash has become the frontrunner, with White House economic advisor Hassett, current Board member Waller, and Boman also in consideration.

Wash’s victory hinges on market concerns over the Fed’s independence. Investors worry that Hassett’s close ties to the White House could lead to aggressive rate cuts, fueling inflation expectations and pushing up long-term interest rates. JPMorgan Chase CEO Jamie Dimon has publicly supported Wash. These concerns are not unfounded—since Hassett became the frontrunner in late November, the 10-year U.S. Treasury yield has risen from 4% to 4.2%. Trump aims to reduce U.S. debt financing costs, and the surge in bond yields runs counter to this goal, making Wash’s independent background a reassuring factor.

Policy Divisions Emerge, 2026 Becomes a Variable

On the surface, Wash leading the Fed could ease market fears about independence, but Trump’s repeated criticism of the Fed’s slow rate cuts remains unchanged, and internal divisions within the Fed are hard to resolve. More challenging is that the new chair won’t take office until May, and monetary policy takes about half a year to transmit to the real economy. Trump has stated that the 2024 midterm elections will determine America’s fate, with the election focusing on inflation issues, objectively limiting the Fed’s room for easing.

Nomura predicts that the new chair will lead a rate cut in June next year, but as the U.S. economy accelerates its recovery, internal Fed opposition to further rate cuts may intensify. Policy disagreements could weaken market confidence in the new chair and even strain relations between the Fed and the Trump administration. This uncertainty is expected to peak between July and November, potentially triggering a wave of capital fleeing U.S. assets. A chain reaction could include falling U.S. bond yields, a correction in U.S. stocks, and a weakening dollar. Major global economies might halt rate cuts or even start rate hikes, further diminishing the attractiveness of dollar assets.

US Dollar Index Technical Outlook: Medium-Term Downtrend Forms, Focus on 90 Level

From the weekly chart of the US Dollar Index, the index has broken below the Gann 2/1 line, indicating a shift from a bullish to a bearish medium-term outlook. In the short term, the dollar may remain volatile with a downward bias, with key resistance at the 99.0-100.0 zone. If the index cannot rebound effectively and reclaim the 100 level, the risk of a medium-term decline toward 95.2 and even 90.0 increases significantly.

The key question for investors is: can the new Fed Chair find a balance between political pressure and market expectations? Can the dollar bottom out before policy divisions intensify? The answers to these questions will gradually emerge in the second half of the year.