Why the dollar may face downward pressure first

The dollar's weakness in the first phase is primarily due to the market's immediate expectations regarding policy after Hassett's appointment.

• Strong 'dovish' label: Hassett is widely regarded as a 'dovish' candidate, and he is highly aligned with Trump's view on 'cutting rates faster and more significantly.' He has publicly stated that if he leads the Federal Reserve, he would 'immediately cut rates.' Such expectations will directly reduce the attractiveness of dollar assets, thereby putting depreciation pressure on the dollar.

• Market trading's 'muscle memory': Historical experience shows that when the market expects the Federal Reserve to adopt accommodative policies, it instinctively trades 'dollar weakness.' Therefore, Hassett's nomination may trigger this automatic response.

Potential drivers for the dollar's subsequent recovery

The rebound of the dollar will depend on the evolution of several key factors, primarily whether market concerns about a 'politicized Federal Reserve' will outweigh the initial euphoria over interest rate cuts.

• Concerns about inflation and the test of the Federal Reserve's independence: This is the most critical variable. If the market believes that the independence of the Federal Reserve is severely compromised, there may be worries about long-term inflation in the United States. Such expectations will push up long-term Treasury yields, leading to a steepening of the yield curve. While interest rate cuts may suppress short-term rates, concerns about long-term inflation risks and fiscal sustainability will push up long-term rates, which may attract capital inflows and support the dollar.

• Internal checks and balances of the FOMC and economic realities: The Federal Reserve Chairman is not a dictator; decisions require a vote by the Federal Open Market Committee (FOMC). Even if Hassett leans towards accommodation, he must persuade other committee members. If economic data (such as inflation) does not decline as expected, cautious voices within the committee may constrain the pace and extent of rate cuts, leading to actual policy strength being less than the market's initial optimistic expectations. This expectation gap may drive the dollar's recovery.

• The duality of policy and the 'safe-haven' nature of the dollar: Extremely accommodative monetary policy may trigger widespread concerns in the market about the US fiscal deficit and uncontrollable inflation, potentially causing volatility in global financial markets. In this 'risk-averse' mode, the dollar, as a traditional safe-haven currency, may regain buying support due to its unique global position.

How to observe the evolution of the market

To determine whether the aforementioned path of 'down first, then up' will materialize, and the timing of its occurrence, you can focus on the following points:

1. Market's immediate reaction post-nomination: Focus on the immediate fluctuations of the dollar index, US Treasury yields (especially those above 10 years), and gold prices after Hassett's formal nomination, as this reflects the market's first impression.

2. Hassett's public statements: During his five-month 'shadow chairman' period, how he balances his relationship with the White House and articulates his views on inflation and the independence of the Federal Reserve will be key indicators.

3. Performance of economic data: The performance of core inflation (PCE) and employment data will be the basis for testing whether Hassett's 'dovish' stance can be realized. If inflation continues to be stubborn, market skepticism about the Federal Reserve's ability to continue large-scale interest rate cuts will deepen.

4. Voices within the FOMC: Pay attention to the speeches of other Federal Reserve officials (especially regional Fed presidents) to gauge the extent of opposition to aggressive rate cuts.