Trump Begins "Overhaul" of the Fed and BLS: Will the Dollar Become the Biggest "Victim"?

　　Many Wall Street strategists and economists say that as the credibility of U.S. institutions comes under threat, the dollar and other U.S. assets may face further selling pressure...

　　U.S. President Trump now has the opportunity to choose a successor for Fed Governor Kugler, who resigned last Friday. This candidate will likely become the "shadow Fed chair" as previously described by Besant—officially taking the Fed chair seat after Powell's term ends in May next year. Undoubtedly, this dynamic could significantly weaken Fed Chair Powell's influence in the coming months.

　　Combined with Trump's firing of Bureau of Labor Statistics (BLS) Commissioner Erica McEntarfer last week, investors may also downgrade the valuation of U.S. assets due to threats to the credibility of economic data. Such concerns already dealt a severe blow to the dollar last Friday and prompted some funds to withdraw from U.S. assets again...

　　Robert Bergqvist, senior economist at SEB, said: "Unfortunately, we are witnessing a new attempt by the White House to further consolidate power. All of this justifies a higher risk premium for holding U.S. assets."

　　Concerns about the politicization of U.S. institutions come as signs of an economic slowdown emerge. Although the dollar showed initial signs of recovery in July, it fell sharply against all G10 currencies last Friday after the U.S. nonfarm payrolls report disappointed.

　　Haddad believes the dollar is vulnerable to more downside pressure—Trump's pressure on Powell and his colleagues to cut rates has "undermined the Fed's independence," while McEntarfer's firing "risks damaging perceptions of the integrity of U.S. economic data."

　　Macro strategist Mark Cudmore pointed out, "The market cannot interpret President Trump's firing of the BLS commissioner in a positive way—either, as Trump claims, U.S. data was previously distorted, or data reliability was at its achievable peak but is now politicized. In either case, the credibility of future data releases has been weakened, and U.S. assets should face a higher risk premium."

　　Derek Halpenny, head of global markets research at MUFG in London, said that among the potential candidates openly speculated to replace Powell, National Economic Council Director Kevin Hassett would be "the worst choice for the dollar due to his close ties to the president."

　　In contrast, Halpenny noted that former Fed Governor Kevin Warsh and current Fed Governors Waller and Bowman, given their Fed experience, are viewed more positively by the market.

　　In any case, with August's thin liquidity due to investor vacations, the nomination of a Fed governor (or quasi-chair) is a risk event for markets. Trump said on Sunday that he intends to announce replacements for Kugler and McEntarfer in the coming days.

　　"The dual turnover of a Fed governor and the BLS commissioner could ultimately affect the difficulty of financing the U.S. twin deficits (fiscal and trade)," said a Deutsche Bank team led by Jim Reid. "Unless there is a significant economic slowdown, this could hinder the rise of U.S. long-term bonds."