Trump's choice to replace Fed Chair Powell will be crucial for the dollar's future

The American dollar is heading for its worst performance in nearly a decade. Market experts think there’s more weakness coming, and it depends on who ends up running the Federal Reserve.

The Bloomberg Dollar Spot Index has fallen 8.1% this year. That’s the steepest yearly drop in eight years. The dollar got hammered after President Donald Trump rolled out his April tariffs, which he called “Liberation Day”, and it’s been under pressure ever since.

Trump has been pushing hard for a more accommodating Fed chairman to take over next year, and that’s kept the currency on the back foot.

Yusuke Miyairi analyzes foreign exchange markets at Nomura. He said “The biggest factor for the dollar in first quarter will be the Fed,” adding that “it’s not just the meetings in January and March, but who will be the Fed Chair after Jerome Powell ends his term.”

Markets are betting on at least two interest rate cuts next year. That puts American monetary policy out of step with several other wealthy nations, making the dollar less appealing to investors.

Europe’s currency has been gaining against the dollar. Inflation there has stayed manageable, and there’s a wave of military spending on the horizon. That’s keeping expectations for rate cuts close to zero. Canada, Sweden, and Australia are different stories; traders are actually betting on rate hikes in those countries.

The Commodity Futures Trading Commission puts out data on currency positioning. For the week ending December 16, it showed something interesting. There was a brief moment this month when people got bullish on the dollar again. That didn’t last. It flipped back to the pessimistic view that’s been around since those April tariffs got everyone worried about the American economy.

All eyes on Powell’s replacement

Right now, everything comes down to the Fed and who’s replacing Jerome Powell. His term as chairman ends in May.

Trump dropped hints recently that he’s picked someone but won’t say who yet. He’s also floated the idea of firing the current Fed leader before the term is up.

Kevin Hassett runs the National Economic Council. He’s been seen as the front-runner for a while now. Trump’s also talked about Kevin Warsh, who used to be a Fed governor. Then there are Fed governors Christopher Waller and Michelle Bowman. Rick Rieder from BlackRock is in the mix too.

Andrew Hazlett trades foreign currencies at Monex Inc. He explained, “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.”

Fed officials split on next moves

Federal Reserve officials can’t seem to agree on when they’ll cut borrowing costs again. Most think more cuts could happen if inflation keeps cooling. But several officials want rates to stay where they are for a while. That came out in meeting records released Tuesday.

The minutes from the Fed’s December 9-10 session showed the disagreements aren’t going away as previously reported by Cryptopolitan. Most backed another rate cut last month, but it wasn’t an easy call for everyone.

The Fed voted 9-3 to trim its key rate by a quarter point in December. That’s three cuts in a row now. The rate is between 3.5% and 3.75%, as Cryptopolitan previously reported.

The minutes stated that “A few of those who supported lowering the policy rate at this meeting indicated that the decision was finely balanced or that they could have supported keeping the target range unchanged.”

Officials changed their statement after the meeting. The new version showed they’re less certain about when future cuts will happen. Their middle projection had just one quarter-point reduction coming in 2026. Individual forecasts were all over the place, though. Market watchers are putting their money on at least two cuts next year.

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