Dollar slips on Fed's credibility concerns as euro nears 4-year high

CNA

3 days ago

SYDNEY/GDANSK :The dollar slipped to multi-year lows against the euro and Swiss franc on Thursday as concerns about the future independence of the U.S. Federal Reserve undermined faith in the soundness of the country's monetary policy.
According to a Wall Street Journal report, U.S. President Donald Trump had toyed with the idea of selecting and announcing Federal Reserve Chair Jerome Powell's replacement by September or October.
"From a market perspective, of course, not only does that undermine the Fed's credibility and independence, clearly, (but) it's a risk to the outlook for U.S. rates as well," said Nick Rees, head of macro research at Monex Europe.
"Those concerns weigh on the dollar this morning," Rees said, adding that pressure on the currency from Trump team's rhetoric could intensify ahead of the expiry on July 9 of "reciprocal tariff" suspensions with trading partners including the European Union.
Trump called Powell "terrible" on Wednesday for not lowering interest rates sharply, while the Fed Chair was telling the Senate that policy had to be cautious as the president's tariff plans were a risk to inflation.
Markets have nudged up the chance of a rate cut at the Fed's next meeting in July to 25 per cent, from just 12 per cent a week ago, and are pricing in 64 basis points of cuts by year-end, up from around 46 basis points last Friday.
They anticipate the next cut is more likely to happen in September than July.
"By the time we get to the September (Fed's policy meeting), we're going to know everything we need to know" in terms of impact from tariffs on the economy, said Kit Juckes, macro strategist at Societe Generale.
NOT SO EXCEPTIONAL
The dollar was under broad pressure as the euro gained 0.4 per cent to $1.1708, its highest level since September 2021.
Sterling rose 0.38 per cent to $1.3717, after hitting its highest since October 2021 earlier in the session, while the dollar was at its lowest in more than a decade versus the Swiss franc at 0.8007. The franc also struck a record peak against the yen around 180.55 overnight.
However, the safe-haven Japanese currency strengthened widely after losses in the previous session.
"From a yen perspective, traders are just looking for next steps from the Bank of Japan," Rees said. "We think (the rate path) is going to be fairly moderate, but we do think it supports sustained yen appreciation in the medium term."
After raising short-term interest rates to 0.5 per cent in January, the Bank of Japan has signalled readiness to raise rates further.
However, its policymakers called for keeping interest rates steady for now due to uncertainty over the impact of U.S. tariffs on Japan's economy, a summary of opinions at the bank's June policy meeting showed on Wednesday.
The U.S. dollar lost nearly 0.7 per cent on the yen to 144.25, while the dollar index sank to its lowest since early 2022 at 97.28.
Trump's tariff policies are also coming back into focus ahead of his July 9 deadline for trade deals.
JPMorgan on Wednesday said tariffs would slow U.S. economic growth and lift inflation, resulting in a 40 per cent chance of a recession.
"The risk of additional negative shocks is elevated, and we expect U.S. tariff rates to move higher," JPMorgan analysts said in their report. "The upshot of these developments is that our baseline scenario incorporates the end of a phase of U.S. exceptionalism."
The ending of "exceptionalism" has been a major theme in the dollar's decline in recent months, as investors question its status as the dominant reserve currency and the main safe haven among currencies.