By Frank Walbaum, Market Analyst at Naga
The US dollar declined on Monday, unwinding Friday’s gains as mounting concerns over the independence of the Federal Reserve shook investor confidence. Reports that federal prosecutors have opened a criminal investigation into Federal Reserve Chair Jerome Powell raise the alarm about political interference in monetary policy.
Such actions risk undermining the Fed’s credibility and its ability to set interest rates based on economic conditions rather than political considerations. The developments appear to be another attempt by the US administration to pressure the central bank into aligning its monetary policy with Trump’s preferences. The latter could introduce additional risk in the market. US Treasury yields could also be vulnerable to heightened volatility, as uncertainty surrounding the Fed’s independence could prompt erratic moves in bond markets.
Looking ahead, any new developments against Fed members could pressure US assets, including the dollar. In the meantime, new data could also direct monetary policy expectations, provided Fed concerns subside to a certain extent.