The Dollar’s Impossible Trifecta | Jon Turek on Why USD Hedging Flows Will Increase Throughout Fed’s Rate Cutting Cycle
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Podcast Summary
In this episode of Monetary Matters, host interviews John Turic of JST Advisors, a global macro research firm, to discuss his bearish outlook on the US dollar despite strong American economic performance. (00:32) Turic argues that the dollar entered 2025 at unsustainable levels, supported by an "impossible trifecta" of high tariffs, high growth, and high rates that has since deteriorated. (01:15) The conversation explores how changing interest rate differentials, evolving capital flows, and reduced hedging costs for foreign investors are creating structural headwinds for dollar strength. (05:53) They also examine Federal Reserve policy decisions amid conflicting economic signals, the implications of Chair Powell's upcoming replacement, and the remarkable surge in gold prices.
- Main Theme: The structural shift away from US dollar dominance driven by changing global capital flows, interest rate differentials, and evolving hedging dynamics in international markets.
Speakers
John Turic
John Turic is the founder of JST Advisors, a global macro research firm that specializes in central banking and macro themes. He co-authored a 2022 staff paper with the New York Federal Reserve called "The Dollar's Imperial Circle," which analyzed the procyclical feedback loops that drove dollar strength during the 2010s. Turic has extensive experience analyzing foreign exchange markets, interest rate policy, and global capital flows.
Key Takeaways
The Dollar's "Impossible Trifecta" Has Collapsed
Turic explains that the market entered 2025 expecting high tariffs, high US growth, and high US interest rates - all bullish factors for the dollar that pushed it to 40-year highs. (01:15) However, this combination has proven unsustainable. Growth has weakened relative to tariff impacts, the Fed has resumed cutting rates, and Germany has announced over a trillion dollars in fiscal spending, creating rebalancing mechanisms that counter dollar strength. This fundamental shift provides a "nice runway" for dollar normalization from overvalued levels, even without dramatic weakness.
Hedging Costs Are Creating Structural Dollar Headwinds
The interest rate differential between the US and other major economies has been a key driver of unhedged capital flows into US assets. (05:53) For example, Taiwanese life insurers buying US corporate bonds would lose most of their returns if they hedged back to Taiwan dollars due to high cross-currency swap costs. However, as the Fed cuts rates while other central banks hold steady, this hedging cost disadvantage is diminishing. This creates a structural shift where foreign investors can maintain US asset exposure while reducing currency risk, weakening the positive correlation between US asset performance and dollar strength.
Real Yield Advantages Are Eroding Globally
Despite a 200 basis point policy rate differential between the US and Europe, Turic notes that real yields are "pretty close to zero" in terms of advantage. (06:35) This occurs because US inflation expectations have risen while European inflation has continued declining. For a country requiring significant capital inflows to fund twin deficits (trade and budget), losing the real yield cushion that has attracted foreign investment since 2014-2015 removes a critical pillar of dollar support. This dynamic challenges the US's ability to continue attracting the incremental capital flows needed to maintain currency strength.
The Fed's New Leadership Will Create Dovish Bias
Chair Powell's departure in Q2 2026 and the Trump administration's preference for a "low rate guy" is creating what Turic calls "new guy risk premium" in markets. (37:07) This dynamic means that even if economic data improves, front-end rates may not fully reflect better growth outcomes because markets must price in the possibility that Powell's replacement will maintain a dovish bias. This asymmetric response function could allow the economy to run hot without corresponding rate increases, potentially exacerbating trade deficits and keeping real yields from rising even in a growth upswing - both negative factors for the dollar.
Labor Market Weakness Trumps GDP Growth Strength
Despite Atlanta Fed forecasts showing 3.8% third-quarter GDP growth, Turic emphasizes that private sector job growth has been "zero to negative" for several months. (45:05) Historically, when labor market and GDP data diverge, the labor market data proves more predictive over 6-12 months. Given that policy remains approximately 100 basis points restrictive, the Fed faces asymmetric risks - cutting too little if the labor market deteriorates could require much more dramatic policy responses later. This labor market softening provides additional justification for the Fed's cutting cycle and supports the case for lower front-end rates.
Statistics & Facts
- The US dollar effective exchange rate reached approximately a 40-year high at the beginning of 2025, according to Turic's analysis of market conditions entering the year. (01:15)
- Germany announced over a trillion dollars in fiscal spending over the coming years, representing a major shift in European fiscal policy that Turic identifies as a key rebalancing mechanism. (02:31)
- US one-year, one-year forward rates have declined 70-80 basis points since the beginning of the year, while European equivalent rates have remained relatively stable, significantly narrowing the interest rate differential that previously supported the dollar. (05:53)
- The Atlanta Fed's GDP Now model is forecasting 3.8% real growth for the third quarter, creating a stark contrast with labor market weakness. (45:29)
- Gold has surged 57% year-to-date to $2,278, representing a 134-140% increase from its 2022 lows, demonstrating the scale of the precious metals rally. (56:56)