- Threat to the Federal Reserve risks spillover effects
- There is a very substantial scope for spillover
- Fed Chair Powell is a friend of mine and a man of the utmost intergrity
- Don't see the same threats to the BoE
- So far, we have seen more hedging of Dollar positions rather than investors saying they don't want Dollars
BoE Governor Bailey warned that the loss of Fed independence risks spillover effects. Such an event wouldn't impact just the US markets, but would have a negative impact on the global financial system. In fact, in case the Fed were to lose independence, the US Dollar would sink and this would have consequences for other central banks too as they will need to manage the extreme volatility of their own currencies.
Moreover, borrowing costs would likely surge not only in the US but in all other advanced economies. US Treasury yields are the benchmark "risk-free rate" upon which global debt is priced. If markets believe the Fed has lost its independence, they will demand a higher risk premium for everyone raising interest rates and negatively impacting the economies.
Bailey also talked about the current de-dollarisation narrative. He said that so far there's just been more hedging instead of investors outright avoiding the US Dollar. The greenback has been mainly driven by Fed's policy expectations.
In fact, in 2024 the long Dollar positioning reached an extreme following Trump's election. The market turned very hawkish on the Federal Reserve and those expectations kept the USD strong. In 2025 though, Trump started to rattle markets with his tariffs agenda that culminated with the Liberation Day in April. The selloff in the US Dollar was just caused by the unwinding of extreme long dollar positions and then on the expectations of Fed rate cuts.
