Dollar on shaky ground as markets fret about Fed independence
Trump denied reports he was planning to dismiss Fed Chair Jerome Powell, but he kept the door open to the possibility and renewed his criticism of the central bank chief for not lowering interest rates.
Investors worry that removing Powell before his term ends in May 2026 would undermine credibility in the U.S. financial system and the dollar as a safe-haven currency.
And a more dovish Fed could lead to a return of inflation and negative real yields on Treasuries, said Mahjabeen Zaman, head of foreign exchange research at ANZ.
"If that comes to fruition, you're going to see a much weaker dollar than we're already expecting," Zaman said in an ANZ podcast. "Such an event, if that even does happen, it will raise questions for Fed independence and credibility, so I think it's only going to be an increase in volatility."
Trump has railed against Powell for months for not easing rates, which he says should be at 1% or lower.
Bloomberg reported that the president is likely to fire Powell soon, and a source told Reuters that Trump polled some Republican lawmakers on firing Powell and received a positive response. Trump said that the reports were not true.
"I don't rule out anything, but I think it's highly unlikely unless he has to leave for fraud," Trump said, a reference to recent White House and Republican lawmaker criticism of cost overruns in the $2.5 billion renovation of the Fed's historic headquarters in Washington.
The dollar index, which measures the greenback against major peers, was little changed at 98.384 after a 0.3% slide on Wednesday. The U.S. currency ticked up 0.2% to 148.14 yen, after a 0.6% decline overnight.
The euro stood at $1.1632, down 0.01%. Sterling edged 0.1% lower to $1.3409.
Investors remain focused on tariffs ahead of an August 1 deadline when many trading partners face higher trade levies.
Trump said on Wednesday the U.S. will probably "live by the letter" on tariffs with Japan and may have another trade deal coming up with India, following his announcement of an accord with Indonesia on Tuesday.
In Japan, investors are focused on a potential power shift in upper house elections this weekend that could strain already frail finances, with long-dated yields soaring to all-time highs as the vote nears.
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