Dollar slumps as Trump undermines Powell; euro, sterling gain

The U.S. dollar slumped to multi-year lows on Thursday, with the Dollar Index falling 0.6% to 96.682, primarily driven by renewed criticism from former President Trump against Fed Chair Powell and reports of Trump considering an early replacement. This fueled significant concerns over the Federal Reserve's independence and led markets to increase dovish bets, with the probability of a July rate cut rising to 25%. Consequently, major currencies including the euro, pound, yen, and yuan all strengthened notably against the weakening dollar.

Analysis

The U.S. dollar has fallen to its lowest level since early 2022, with the Dollar Index declining 0.6% to 96.682, driven by significant concerns over the future independence of the Federal Reserve. This weakness stems from President Trump's intensified criticism of Fed Chair Jerome Powell, branding him "terrible," and reports of plans to announce Powell's replacement months before his term ends in May 2026. This political pressure is directly impacting monetary policy expectations, causing markets to more than double the priced-in probability of a July interest rate cut to 25% from 12% a week ago. The dollar's decline has triggered broad-based strength in other major currencies. The EUR/USD rose 0.4% to 1.1706, its highest since September 2021, and the GBP/USD climbed 0.6% to 1.3748, a peak not seen since January 2022. In Asia, the dollar fell 0.9% against the yen to 143.97 ahead of key Tokyo inflation data, while the Chinese yuan reached a seven-month high on expectations of new government stimulus.

Key Decisions for Investors

• Given the escalating political pressure on the Federal Reserve, investors should anticipate continued volatility and potential further weakness in the U.S. dollar, warranting a review of unhedged USD exposure.
• Traders may consider tactical long positions in EUR, GBP, and JPY against the USD, but must monitor key risks such as the 1.170 level for the Euro, U.S. trade policy developments, and upcoming Tokyo inflation data for the Yen.
• Monitor U.S. economic data closely, as any signs of softness could rapidly amplify dovish Fed expectations beyond the current 25% probability for a July cut, further pressuring the dollar.
• Factor in a heightened U.S. governance risk premium, as threats to central bank independence could lead to unpredictable market reactions and undermine long-term confidence in U.S. monetary policy stability.