BoE Governor Bailey warns that the loss of Fed independence risks spillover effects

Concern Over Economic Instability

BoE Governor Bailey warns that the loss of Federal Reserve independence poses risks not only to US markets but also to the global financial system. Should this loss occur, the US Dollar could plunge, forcing other central banks to manage extreme volatility in their own currencies. This scenario would likely result in soaring borrowing costs across advanced economies, affecting economic stability globally.

Context of De-dollarisation

Bailey also addressed the current narrative surrounding de-dollarisation, indicating that there has been more hedging from investors rather than a direct avoidance of the US Dollar. The greenback has remained strong due to Fed policy expectations, with long Dollar positions reaching extreme levels in 2024.

Future Outlook for the Dollar

Looking ahead, concerns arise that Trump's tariff policies could unsettle markets in 2025, leading to a selloff of the US Dollar. As the previously strong Fed hiking expectations begin to fade, the unwinding of extreme long Dollar positions is anticipated, which may significantly impact the Dollar and other currencies.