USD slides on Fed independence threat – Scotiabank

The sell-off in the USD and US assets generally has resumed. President Trump’s comment last week on the future of Fed chairman Powell, when he remarked that the Fed Chair’s 'termination' could not come fast enough, was followed up Friday by a remark from the Chair of the White Council of Economic Advisors, Kevin Hassett, that the president was studying whether he is able to remove the Fed chair. Threats to the Fed’s independence have spooked investors, Scotiabank's Chief FX Strategist Shaun Osborne notes.

USD, US stocks and bonds weaken on threats to Fed independence

"Political interference in Fed policy making would erode confidence in the USD and may bolster inflation in the longer run. There is ample literature showing a high correlation between central bank independence and low and stable inflation. It is unclear in law whether the president can fire the Fed chairman. It has, however, been the subject of speculation in recent weeks. One possible “work around” for the administration would be to nominate Powell’s replacement well before his term ends in 2026; a 'chairman in waiting' could talk about monetary policy before taking office, undermining the incumbent’s position and communication."

"Regardless, investors need no additional excuses to sell US assets at the moment amid concerns about the impact of the president’s tariff policy. CFTC data from Friday shows a clear and significant weakening in USD sentiment in recent weeks. The only surprise in these data is perhaps that there are still pockets of the market that are clinging on to net USD longs (hedge funds) and that the market is not actually a lot shorter USD at this point."

"The risk of a further, significant fall in the USD appears to be rising. There EUR is a top-performer on the session, rising more than 1%; it is no coincidence that the ECB’s independence credentials are impeccable. There are no major data reports from the US today and only few key reports over the week. Investors will be monitoring what data reports we do get to help resolve the apparent conundrum reflected in weak 'soft' data (surveys) and resilient 'hard' data recently. One suggestion is that the disparity may reflect a short-run burst of activity ahead of the 90-day tariff pause window closing."