No love for the dollar as markets fret about Fed independence
A battered dollar is taking another beating as investors, unnerved by fresh signs of an erosion in US central bank independence, waste no time in pushing the greenback back to its lowest levels in over three years.
President Donald Trump on Wednesday called Federal Reserve Chair Jerome Powell "terrible" in his latest attack on the Fed chief and said he has three or four people in mind as contenders for the top Fed job.
The dollar was back at multi-year lows against a basket of other major currencies on Thursday, erasing a brief respite provided by safe-haven flows related to Middle East tensions earlier in the week.
Down 10% so far this year and set for its worst year since 2003, the dollar was expected to weaken further as renewed concern about Fed independence comes amid increased expectations for rate cuts and a looming July 9 deadline for trade agreements.
"We are short the dollar in this environment, where there is an erosion of institutions," said Kaspar Hense, a senior portfolio manager at RBC BlueBay Asset Management. Being 'short' a currency means holding bets it will fall in value.
"This is not currently 100% in the price, and it would still move markets if someone like Hassett or Bessent would get the job in order to cut rates, ignoring fundamental risk," Hense said.
The leading contenders for next Fed chief reportedly include former Fed Governor Kevin Warsh, National Economic Council head Kevin Hassett, current Fed Governor Christopher Waller, and Treasury Secretary Scott Bessent.
"I think the market is pricing in President Trump appointing someone who at least at first sight appears more sympathetic to his cause," said Societe Generale chief FX strategist Kit Juckes.
Comments earlier this week meanwhile by Fed policymaker Michelle Bowman, recently tapped by Trump as the Fed's top bank overseer, that the time to cut rates is getting nearer weakened the dollar as rate-cut expectations rose.
Traders now price in a nearly 25% chance of the Fed cutting rates in July compared to 12.5% last week.
Trump's confrontations with longstanding allies over trade and security, and his attacks on the Fed, have revived questions in Germany around its holdings of central bank gold, some of which is stored at the New York Fed.
European Central Bank supervisors are asking some of the region's lenders to assess their need for dollars in times of stress, gaming out scenarios in which they cannot rely on tapping the Fed under the Trump administration, Reuters reported last month.
Nick Rees, head of macro research at Monex Europe, said the big short-term risk for markets was that the Fed criticism continued.
"I'll be perfectly honest, I'm currently rewriting them in the light of what we are seeing right now," he said, referring to short-term currency forecasts.
"We had thought the dollar should stabilise around current levels because the macro data is about to turn really quite positive."
ING said the euro's break above $1.17, put $1.20 firmly in sight although sentiment towards the greenback would have to deteriorate further to get there.
Seema Shah, chief global strategist at Principal Asset Management, noted that the dollar had not benefited as much as expected in the past two weeks from heightened Middle East tensions, a sign the dollar's safe-haven role had been hurt.
In recent years, the currency has risen when oil rallies, but it gained just 0.7% last week.
The dollar, the world's No.1 reserve currency, has come under fire this year from erratic US policy making that has exacerbated economic uncertainty and put the notion of US exceptionalism into doubt.
Concern about Fed independence adds to the damage, investors said. Respect for independent institutions such as central banks has long been viewed as a key attraction of major economies, helping anchor economic stability and provide policy certainty.
A survey of 75 central bank reserve managers published earlier this week by think-tank OMFIF showed that 70% of those surveyed said the US political environment discouraged them from investing in the dollar -- more than twice the share a year ago.
"Talk about having the next Fed chair announced within the next couple of months, that would be fairly disruptive," said Shah.
"It brings up the whole concern about the credibility and reliability of US institutions again, which is typically something that people don't like."
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Khaleej Times
2 hours ago
- Khaleej Times
US Treasuries face stablecoin-driven demand surge as supply looms
The potential for stablecoins to fuel demand for short-term U.S. Treasury securities was a hot topic at a money market fund conference in Boston this week, with investors expecting these digital tokens to absorb a huge supply of government debt later this year. Stablecoins are pegged to highly liquid assets such as the U.S. dollar and the tokens can drive demand for U.S. Treasuries by requiring issuers to hold large, liquid, and safe reserves to support a 1:1 peg to the greenback. "Stablecoins are drawing for the Treasury market," said Yie-Hsin Hung, CEO of State Street Global Advisors, in keynote remarks at the Money Fund Symposium on Monday. She said about 80% of the stablecoin market is invested in either Treasury bills, known as T-bills, or repos, which are repurchase agreements. That represents about $200 billion, roughly less than 2% of the overall Treasury market. "But stablecoins are growing fast, and most likely, will outpace the growth of Treasury supply," Hung said. As more financial institutions and corporations adopt stablecoin for payments, remittances, or decentralized finance applications, issuers need to hold more reserves to back the growing supply. For instance, if the market capitalisation of USDC, a stablecoin issued by Circle, increases by $10 billion, the issuer might purchase $10 billion in Treasuries to maintain the peg. Circle, a payments technology company, and Tether, a blockchain-enabled platform, are the two largest stablecoin issuers. Given expectations of looming Treasury supply of as much as $1 trillion by the end of the year, the market is looking for an incremental buyer that would be a source of new demand for U.S. government debt. Stablecoin issuers fit the bill, market participants said. "If they do indeed squeeze this supply balloon on Treasuries and rely on the front end of the curve for debt issuance, we think that one of the that all this demand that's coming from (U.S. Treasury Secretary Scott) Bessent cover in order to make that shift to the shorter end," said Mark Cabana, head of U.S. rates strategy at BofA Securities, during one of sessions at the symposium. Cabana noted that stablecoin issuers tend to buy T-bills and shorter-dated Treasury coupons. In an emailed statement on Thursday after the story's initial publication on Wednesday, Tether said it already holds over $120 billion in U.S. Treasuries and continues to act as a significant buyer of short-term government debt. It added that it is already the fifth largest purchaser of U.S. Treasuries. "While we don't speculate on future Treasury issuance or allocations, we remain committed to maintaining highly liquid, dollar-based reserves," Tether said. Circle echoed similar sentiments. The firm noted that the majority of USDC reserves are held in the Circle Reserve Fund, which contains cash, short-dated Treasuries, and overnight repos designed to make USDC redeemable 1:1 for U.S. dollars," a Circle spokesperson said. "This full-reserve composition makes Circle a natural buyer of short-dated U.S. Treasuries and lender in the U.S. Treasury repo market, however, market demand for USDC determines the overall size of our reserves." Adam Ackermann, head of portfolio management at Paxos, a financial services and technology company, said he has had multiple conversations with the largest banks in the world wanting a stablecoin. "They're calling us and saying: I need a stablecoin in eight weeks. How can we get one?" "What's somewhat concerning is we're just at this fever pitch right now," Ackermann said. "It's great for the industry, but we need to start to put some guardrails on things." Stablecoins' popularity further ramped up after the U.S. Senate passed last week a landmark bill to create a regulatory framework for the token called the GENIUS Act. The Republican-controlled House of Representatives still needs to pass its version of the bill before it heads to President Donald Trump's desk for approval, but the bill's passage bolstered hopes of wider adoption of a once-niche part of the crypto sector. The stablecoin market is worth about $256 billion, according to crypto data provider CoinMarketCap, and is estimated by Standard Chartered to reach $2 trillion by 2028 if the legislation is signed by Trump. "I expect that there will be a proliferation of stablecoins," Cabana said. "It will be an incremental demand source (for Treasuries), I would guess, over the next three to five, certainly 10 years."
Zawya
2 hours ago
- Zawya
Fed plan to ease leverage rule offers windfall for big US banks, Morgan Stanley says
A Federal Reserve plan to relax leverage rules could free up $185 billion in capital and unlock nearly $6 trillion in balance sheet capacity for large U.S. global banks covered by Morgan Stanley, the brokerage estimated on Thursday. The U.S. Fed unveiled a proposal on Wednesday that would overhaul how much capital large global banks must hold against relatively low-risk assets, as part of a bid to boost participation in U.S. Treasury markets. The plan, approved by a 5-2 Fed vote, marks the first in a possible series of deregulatory moves led by the central bank's new vice chair for supervision, Michelle Bowman. The proposal would reform the so-called "enhanced supplementary leverage ratio" so that the amount of capital banks must set aside is directly tied to how large a role each firm plays in the global financial system. "SLR reform is the first of many capital proposals we expect over Michelle Bowman's tenure," Morgan Stanley analysts led by Betsy Graseck wrote in a note, adding that in a positive for banks the Fed chose the rule change with the biggest increase in excess balance sheet capacity. Fed officials described the changes as a necessary fix to a rule introduced after the 2008 crisis, saying the leverage requirement had grown over time to occasionally limit bank activity, especially as government debt surged in recent years. "The Fed's proposal to calibrate eSLR should give the banking system meaningful capacity to expand its balance sheet in low-risk assets," analysts at brokerage Barclays said. "It makes sense for banks to utilize the theoretical leverage capacity as long as the return from investing in low-risk assets/activity is sufficient," they said. (Reporting by Manya Saini in Bengaluru; Editing by Sriraj Kalluvila)
Zawya
2 hours ago
- Zawya
Crypto exchange Kraken debuts peer-to-peer payments app Krak
Crypto exchange Kraken on Thursday launched a peer-to-peer payments app that enables users to send and receive funds - in both cryptocurrency and fiat currency - across more than a hundred countries. The move is a bid to expand Kraken's offerings beyond its digital asset trading business, and puts the firm in competition with PayPal, Venmo and Block's CashApp. WHY IT'S IMPORTANT Crypto exchanges such as Kraken are increasingly signaling an interest in expanding outside of the digital asset trading that initially became popular with retail investors. Kraken said last month that it is launching tokens of U.S. equities, called xStocks, in select markets outside the United States. CONTEXT Krak users will have a dedicated spend account and will be able to instantly send and request payments across 300 different assets, including crypto and local currencies, the company said in a press release. Crypto transfers will be made using blockchain technology, while Kraken will make cash transfers internally without using external banking infrastructure. KEY QUOTE "We're able to move money across borders right off the bat, because that's what we do from a trading perspective in our venues, and we've actually already spent over 10 years building out that system for money transmitter licenses... in all the jurisdictions," said Arjun Sethi, co-CEO of Kraken, in an interview with Reuters. "You have to do that as an exchange anyways, and so what we realized is that our customers just wanted to do more with their money." WHAT'S NEXT Kraken plans to launch a series of products through Krak in the future, including physical and virtual cards as well as pay-in-advance services like loans, the company said. (Reporting by Hannah Lang in New York; Editing by Louise Heavens)
