“The biggest factor for the dollar in first quarter will be the Fed,” said Yusuke Miyairi, a foreign-exchange strategist at Nomura. “And it’s not just the meetings in January and March but who will be the Fed Chair after Jerome Powell ends his term.”
With at least two rate reductions priced in for next year, the US’s policy path diverges from some of its developed peers, further dimming the dollar’s appeal.
The euro has surged against the greenback as benign inflation and a coming wave of European defence spending keep rate-cut bets close to zero. In Canada, Sweden and Australia, meanwhile, traders are wagering on rate hikes.
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This month, a brief period of bullish positioning on the dollar reverted to the more pessimistic stance that’s dominated since the April tariffs fuelled concerns about the US economy, Commodity Futures Trading Commission data for the week ending Dec 16 show.
For now, it’s all about the Fed and who steps in to replace Jerome Powell, whose term as chair is set to end in May.
Trump recently teased that he has a preferred candidate but is in no hurry to make an announcement — while also musing that he might fire the central bank’s current leader.
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National Economic Council Director Kevin Hassett has long been seen as the leading candidate, while Trump also expressed interest in former Fed governor Kevin Warsh. Fed governors Christopher Waller and Michelle Bowman and BlackRock’s Rick Rieder are also seen as being in the running.
“Hassett would be more or less priced in since he has been the frontrunner for some time now but Warsh or Waller would likely not be as quick to cut, which would be better for the dollar,” said Andrew Hazlett, a foreign-exchange trader at Monex Inc.
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