Trump’s push against Powell is the latest reason to sell US assets
If the Fed’s credibility is called into question, it could severely erode confidence in the greenback, says an OCBC strategist
THE sell-America trade gathered momentum on Monday (Apr 21) as President Donald Trump continued to contemplate the possibility of firing Federal Reserve chairman Jerome Powell.
The US dollar tumbled, and stock futures dropped along with 10-year Treasuries as investors weighed the risk of Powell’s dismissal and its implications for the world’s largest economy.
The selling intensified following National Economic Council director Kevin Hassett’s remarks on Friday that Trump was studying the matter, after a report said the president was exploring such a move.
The prospect of Powell’s removal has dealt a fresh blow to US assets, after Washington’s aggressive trade tariffs fanned fears of a recession and fuelled doubts about the status of Treasuries as the haven of choice. Trump has said that a cheaper currency would make the nation’s products more competitive, adding to the pressure on the greenback.
“Frankly, firing Powell stretches belief,” said Christopher Wong, strategist at OCBC. “If the credibility of the Fed is called into question, it could severely erode confidence in the (US) dollar.”
The Bloomberg Dollar Spot Index tumbled to the lowest level since January 2024. Amid holiday-thinned trading, the yen strengthened to a level last seen in September, while the euro rallied to the highest in over three years.
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“We believe (US) dollar weakness will continue,” Win Thin, global head of markets strategy at Brown Brothers Harriman, wrote in a note. “The attack on Fed independence is intensifying. The admission that this is being studied at all should be taken very seriously and very negatively.”
Several hedge funds were among those selling the US dollar on Monday after Hassett’s remarks, according to traders familiar with the transactions, who asked not to be identified because they have not been authorised to speak publicly.
Hedge funds are now the least bullish on the greenback since October, Commodity Futures Trading Commission aggregated data showed.
While headlines on Powell are certainly not helping sentiment, others have said that the worsening global trade war will likely continue to be the dominant driver on greenback trading.
“Central bank independence is so valuable – not something to take for granted and so difficult to win back if it’s ever lost,” said Will Compernolle, macro strategist at FHN Financial in Chicago. “His threats against Powell are not helping foreign investors’ confidence in US assets, but I still think that tariff updates are the main drivers.”
However, some said that the volatility generated by the headlines may actually work in Powell’s favour.
“As always, Trump is hard to predict, but the relatively quieter US-China tariff headlines last week hint that the markets could be staying Trump’s hand,” said Maximillian Lin, a strategist at Canadian Imperial Bank of Commerce. “If that is true, it should presumably extend to Powell’s job security as well.”
The selling on Monday was not confined to the greenback. US stock futures dropped as much as 1 per cent and benchmark 10-year government bond yields climbed two basis points.
The Treasury curve twist-steepened, with two-year notes outperforming other tenors, amid speculation that a removal of the Fed chair would pave the way for more interest rate cuts.
The prospect of more rate reductions had resulted in a recent steepening in the yield curve. The extra yield that investors demand to own 30-year Treasuries over two-year maturities had increased for nine straight weeks, a streak seen only one other time since Bloomberg began collating the data in 1992.
The longer end was also pressured amid speculation that hedge funds were unwinding leveraged trades.
Meanwhile, warnings from Wall Street equity strategists have piled up as Trump’s trade war undermines the outlook for US economic growth and earnings.
Strategists at Citigroup last week lowered their view on US equities, saying cracks in “US exceptionalism” will persist. They joined the likes of Bank of America and BlackRock in turning cold on the stocks in recent days.
Amid all the jitters, market participants are pondering if Trump can actually move to fire Powell.
A president cannot dismiss a Fed chair easily, legal scholars say. Section 10 of the Federal Reserve Act stipulates that members of the Fed’s Board of Governors, of which the chair is one, can be “removed for cause by the president”. Legal scholars have generally interpreted “cause” to mean serious misconduct or abuse of power.
At the same time, market watchers are awaiting a Supreme Court ruling on a case that tests an earlier court decision which lets Congress shield high-ranking officials from being fired. The legal wrangling could ultimately affect whether Trump has the power to fire Powell.
However things play out, some said that the prospect of Powell’s removal is but the latest in a string of reasons to cut exposure to the greenback.
“The latest catalyst for dollar selling might have been pressure on Powell, but the reality is that no further justification for USD selling is needed,” said Gareth Berry, a strategist at Macquarie in Singapore.
“What has already happened over the past three months is justification enough to warrant ongoing USD selling, perhaps for months to come.” BLOOMBERG
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