Dovish new chairman showdown, the dollar falls first as a courtesy

Trump stated in a speech on Tuesday that he would decide this week who will replace the outgoing Federal Reserve Governor Kugler, and use this vacancy to select the future Federal Reserve Chair.

Although the market has already priced in that Trump will appoint a more dovish Federal Reserve Chair, Kugler's resignation has accelerated this timeline, becoming a new catalyst for the weakening of the dollar.

Figure: The winning probabilities of four candidates on Polymarket

I. Policy Profiles of Four Potential Chairs

1. Kevin Warsh

• Background: 55 years old this year. Former Federal Reserve Governor (2006-2011), participated in addressing the 2008 financial crisis, currently a researcher at the Hoover Institution at Stanford University.

• Policy Position: Dovish. Believes current interest rates are too high, strongly supports rate cuts to stimulate the economy, aligning with Trump's goal of reducing government debt costs.

• Probability: Leading with a 30% chance on Polymarket. He will meet with Treasury Secretary Basant in Washington before July 2025 to discuss the Federal Reserve Chair position.

2. Kevin Hassett

• Background: 63 years old this year. Current Director of the White House Council of Economic Advisers, one of Trump's closest economic advisors.
• Policy Position: Dovish. Aligns with Trump, advocating for a "tariff + rate cut" combination to stimulate the return of manufacturing.
• Probability: Second on Polymarket with a 26% chance. He has met with Trump at least twice in June 2025 to discuss the Federal Reserve Chair position.

3. Christopher Waller

• Background: 66 years old this year. Current Federal Reserve Governor, appointed by Trump in 2019.
• Policy Position: Dovish. Voted against at the July FOMC meeting alongside Bowman, calling for an immediate 25bp rate cut. Believes inflation risks are manageable, while the risks of a weak job market are greater. Argues that tariffs are a "one-time shock" to inflation and should not hinder rate cuts.
• Probability: Third on Polymarket with a 22% chance. Waller was personally nominated by Trump in 2019, holding the identity of an "insider"; he also publicly acknowledged on August 1 that "I would accept if the president offers the position."

4. Michelle Bowman

• Background: 53 years old this year. Nominated by Trump to the Federal Reserve Board in 2018, serving as "Vice Chair for Supervision" of the Federal Reserve starting June 2025

• Policy stance: Shift from hawkish to dovish. Bowman has previously been a strong hawk, opposing a one-time rate cut of 50bp in September 2024, advocating for a 25bp cut. However, this year he has turned dovish, voting in July for a rate cut due to a weak labor market + inflation nearing the 2% target.

• Probability: The lowest winning probability on Polymarket, <10%.

II. "Shadow Chairman" Effect: A New Catalyst for Dollar Weakness

Recently, Trump launched a "triple personnel strike": firing the BLS director, announcing a new board member this week, and quickly nominating a new Federal Reserve chairman. When "data power + interest rate power" is held in one hand, the independence of the Federal Reserve is fading, which may be the next incentive for "de-dollarization" trades after the 4.2 liberation day.

In terms of personnel, the new Federal Reserve chairman is likely to lean dovish; in terms of data, it also seems to support the Fed's dovish shift. The "hard data" non-farm payrolls have already collapsed, while "soft data" is also showing cracks. The latest ISM services index fell to 50.1, below expectations. Among them, the employment index dropped to 46.4, and the payment prices index climbed to 69.9 (the highest since October 2022), indicating concerns about stagflation in the U.S.

Chart: ISM Services PMI sub-indices show economic stagflation risks

III. Trading Ideas

Currently, the market expects a 90% chance of a rate cut by the Federal Reserve in September, with an expectation of 2.3 cuts within the year; while the European Central Bank's expectation for a rate cut this year is only 0.6 times, the interest rate differential between Europe and the U.S. is rapidly narrowing.

Chart: The 2-year interest rate differential between Germany and the U.S. has risen by 20bp this month, narrowing the divergence with EURUSD

From the market trading sentiment, the CFTC long positions in euros have remained high even during the euro's pullback in July, and the euro's options risk-reward ratio (RR) has started to rise again after August, indicating that market sentiment still leans towards being bullish on the euro and bearish on the dollar.

Chart: EURUSD options RR and EURUSD spot

From a technical perspective, after experiencing a nearly 400 pips pullback in late July, EURUSD returned to stand above the 50-day moving average (1.1590) this Wednesday, re-entering the upward channel, making it a cost-effective choice to chase long positions in euros on the right side Figure: EURUSD has been rising along the 50-day moving average this year

Risk Warning and Disclaimer

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