How will the new Federal Reserve Chair set the tone for the dollar outlook? The second half of 2026 may face liquidity risks in the market.

Trump Aims for Rapid Rate Cuts, New Chair Nominee Sparks Market Divisions

U.S. President Trump is expected to announce his choice for the new Federal Reserve Chair in the first week of January. According to media reports, leading candidates include White House Economic Advisor Haskett, former Fed Governor Wosh, current Fed Governor Waller, and Baumann. The new Chair will succeed Powell in May next year and officially take office.

The Trump administration has a clear goal for interest rate policy — to lower the federal funds rate to 1% or even lower within a year to reduce the financing costs of U.S. government debt. In mid-December, Trump explicitly stated in an interview that Wosh is his preferred candidate for Fed Chair, while also affirming Haskett’s capabilities.

However, market opinions on these two candidates are diverging. JPMorgan Chase CEO Jamie Dimon publicly supports Wosh for Fed Chair, citing concerns that Haskett might lack sufficient independence and could be overly inclined toward the White House stance, potentially leading to excessively loose policies and igniting inflation expectations. These concerns are already reflected in the bond market — since late November, when Haskett was reported as the frontrunner, the 10-year U.S. Treasury yield has surged from 4% to 4.2%.

Independence vs. Rate Cut Expectations: The Future of the Dollar Remains Uncertain

If Wosh ultimately becomes the new Chair, short-term concerns about Fed independence may ease, which could support the dollar. But this relief might be temporary.

A key issue is that Trump has repeatedly criticized the Fed for being too slow in cutting rates, implying that internal policy disagreements within the Fed may persist. More importantly, Trump has indicated that next year’s midterm elections will directly impact the U.S. economic outlook, with election issues focusing on prices, and he believes voters will support his economic policies.

From a policy transmission perspective, monetary policy takes about half a year to fully impact the real economy. This means that even if the new Chair takes office in May, it will be difficult to immediately initiate a continuous rate-cutting cycle. It is expected that in the first half of 2026, the Fed will continue to maintain easing expectations. Coupled with the potential easing of trade tensions, risk assets in the market might receive short-term support. However, the room for further rate cuts by the Fed is limited, and rapid, large-scale rate reductions are unlikely to materialize.

The Second Half of 2026 as a Risk Concentration Period

The real test will occur in the second half of 2026. By then, if signs of economic recovery emerge, the Fed may strongly oppose further rate cuts. Meanwhile, the approaching midterm elections could also constrain room for easing policies. The combination of these two factors is likely to trigger policy conflicts between the Fed and the Trump administration, weakening market confidence in the new Chair.

Nomura Securities’ forecast warrants caution: the new Fed Chair is expected to cut rates once in June next year, but subsequent policy space will be significantly limited. This uncertainty is expected to peak between July and November, potentially leading to a collective retreat from U.S. assets. Possible chain reactions include a decline in U.S. Treasury yields, a correction in U.S. stocks, and a significant weakening of the dollar. Investors should prepare for potential liquidity reversals during this period.

It is also worth noting that major global economies are experiencing rate-cutting cycles, but if the Fed cannot continue easing, these economies might even enter a rate-hiking phase. In such an environment, the relative attractiveness of dollar assets could diminish.

Technical Outlook for the US Dollar Index: Mid-term Downtrend Established, Possible Bottom at 90

From a technical perspective, the weekly chart of the dollar index shows that the dollar has broken below the Gann 2/1 line, indicating a shift to a mid-term downtrend. In the short term, the index may continue to fluctuate downward, with key resistance around the 99.0–100.0 zone.

If the index fails to rebound effectively and reclaim the 100 level, it could further decline in the mid-term, with the next target potentially at 95.2 or even 90.0. This aligns with the fundamental risk outlook that anticipates dollar weakness in the second half of 2026.

Considering policy uncertainties and technical pressures, the dollar faces significant downside risk in the second half of next year. Investors should closely monitor shifts in Fed policy and U.S. economic data.