Dollar drifts as investors ponder Fed independence ahead of Powell speech

The U.S. dollar drifted on Thursday as investors fretted about the Federal Reserve’s independence after yet another attack from President Donald Trump ahead of remarks from Chair Jerome Powell later this week that could influence the outlook for rates.

Trump called on Fed Governor Lisa Cook to resign on the basis of allegations made by one of his political allies about mortgages she holds in Michigan and Georgia, intensifying his effort to gain influence over the U.S. central bank.

Cook said she had “no intention of being bullied to step down” from her position at the central bank. Trump has also told aides he is considering trying to fire Cook, the Wall Street Journal reported on Wednesday.

“It has the potential to raise questions around the Fed’s oversight and regulatory functions but it has little to no near-term monetary policy implications,” said Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities.

That explained the relatively muted reaction in the currency markets to the news as the dollar initially dipped on the news but was mostly calm into the Asian session.

The Japanese yen held onto gains made in previous sessions and was little changed at 147.41 per dollar, while the euro was steady at $1.1642. Sterling last fetched $1.34535.

That left the dollar index, which measures the U.S. currency against six other peers, steady at 98.301.

Trump has repeatedly criticised Powell for being too slow to cut rates, stoking investor worries about the central bank’s independence and its credibility.

Investors expect Trump will replace Powell with a more dovish appointment when his term ends in May. Trump earlier this month said he would nominate Council of Economic Advisers Chairman Stephen Miran to serve out the final few months of a vacant Fed seat after Adriana Kugler unexpectedly resigned.

Kristina Clifton, a senior economist at the Commonwealth Bank of Australia (OTC:CMWAY) in Sydney, said if Cook resigns it would create another opening for Trump to appoint a Fed Governor who will vote to lower interest rates.

“Perceived political interference in the Federal Reserve can undermine its independence, steepening the yield curve and denting the USD’s safe haven status.”

POWELL SPEECH

The main focus this week has been on whether Powell will push back against market expectations for a rate cut at the Fed’s September 16-17 meeting when he speaks on Friday at the Jackson Hole meeting, following a weak jobs report for July.

“Markets are adamant that recent labour market data necessitates some policy calibration and are expecting Chair Powell to tip his hat in that direction,” TD’s Newnaha said.

Traders are pricing in an 82% chance of a 25-basis-point rate cut next month, CME FedWatch tool showed. While the odds have lowered from last week after hotter than expected producer price inflation tempered expectations, investors are still pricing in over 50 bps of easing this year.

Some analysts cautioned that markets could end up being disappointed by Powell’s speech, noting that the impact of Trump’s tariffs on inflation remains uncertain.
“It is not clear that Powell will deliver strong guidance,” said Benoit Anne, managing director in the investment solutions group at MFS Investment Management. If the dovish signals elude us, there will be significant pricing out of the odds for a September cut.”

In other currencies, the New Zealand dollar was nursing steep overnight losses at $0.58205 after diving 1.2% to its lowest level since April. New Zealand’s central bank cut interest rates on Wednesday as expected but left the door wide open to yet more easing if needed.

The Australian dollar eased 0.13% to $0.64245, hovering near a two-week low. [AUD/]