Powell is criticized, the dollar falls! Powell yields, the dollar collapses?

Trump has publicly criticized Federal Reserve Chairman Jerome Powell for several consecutive days, and regardless of whether Powell yields, it is bad news for the dollar.

On Monday, U.S. President Trump posted again on social media, calling Powell "Mr. Too Late" and "a big loser", suggesting that if the Federal Reserve does not cut interest rates soon, the economy may slow down. This marks the third consecutive day that Trump has publicly urged the Federal Reserve to follow the European Central Bank's rate cut.

Under Trump's attack, the dollar plummeted overnight to its lowest point since October of last year, with funds rapidly flowing into safe-haven assets such as the Swiss franc, Japanese yen, and gold.

Former Goldman Sachs chief foreign exchange analyst Robin Brooks believes this could be a replay of the Federal Reserve's policy shift at the end of 2018, where the Federal Reserve may again yield to political pressure and accelerate rate cuts. Brooks pointed out on social media:

"On December 19, 2018, after the Federal Reserve raised interest rates, Trump pressured the Federal Reserve, leading to a sharp drop in the S&P 500 index. Subsequently, the Federal Reserve turned dovish on January 4, 2019, with Powell stating 'the Federal Reserve is listening to the market,' laying the groundwork for a 75 basis point rate cut later that year. The old script is playing out again…"

If the 2018 script is followed, after the Federal Reserve begins to cut rates, the dollar may rebound after an initial decline. However, Barclays warns that if Powell yields to political pressure, the dollar will face a more severe depreciation risk.

Powell Yields, Dollar Crashes?

In a recent research report, Barclays' foreign exchange strategy team warned that if the independence of the Federal Reserve is questioned, the risks to the dollar are "too significant to ignore."

The Barclays research team believes that the policy pressure from the Trump administration has put the dollar in a particularly vulnerable state. The report states: "The market has begun to consider the possibility of de-dollarization, a reduction in reserves, and a withdrawal from the over-allocation to U.S. assets."

In this context, interference with the Federal Reserve will further exert downward pressure on the dollar.

Barclays analysts, including Themistoklis Fiotakis, warned: "The independence of the Federal Reserve is at risk, and this presents a very significant tail risk event for the most important financial institution in the contemporary global financial architecture, posing a threat not only to the dollar but also to the global financial system."

Barclays stated that although the likelihood of Trump replacing Federal Reserve Chairman Powell remains low, the risk of damage to the Federal Reserve's independence has become the most noteworthy tail risk in the dollar's trajectory, and related pressures and noise may persist until Powell's term ends. In such an environment, the dollar has no reason to trade at levels significantly above fair value.

Barclays warns that once the market interprets future easing policies as a result of intervention by the Trump administration, the downside risk for the dollar will intensify. However, it is worth noting that Barclays also acknowledges that there are many historical cases where the loss of central bank credibility has led to tightening financial conditions, with Brazil being a recent example, as the country raised interest rates against the backdrop of global easing