Trump’s Latest Powell Attack Puts the U.S. Dollar in the Center of the Storm

*** ONE-TIME USE *** President Donald Trump and Federal Reserve Chair Jerome Powell. (Getty Images)

What’s the quickest way to end a nine-day rally by the U.S. dollar ? Let reports trickle out that Federal Reserve Chairman Jerome Powell could be fired soon.

The U.S. dollar fell sharply Wednesday after the White House suggested that President Donald Trump was planning to remove Federal Reserve Chairman Jerome Powell. Though the president later said firing Powell was “unlikely,” the damage to the dollar was done.

“He should have cut interest rates a long time ago,” Trump said Wednesday. “I think he does a terrible job and he’s cost us a lot of money. And that goes for the Board as well.”

“I’m surprised that Biden put him in and extended him,” he added. Powell was, in fact, appointed by Trump in 2017, although his term was extended by the former president in 2022.

Stocks turned sharply lower following the news, but pared some of those declines on the back of Trump’s remarks in the Oval Office.

The U.S. dollar index, which tracks the greenback against a basket of six global currencies, was last marked 0.6% lower on the session at 98.03. The index had fallen as low as 97.71 earlier in the session and has fallen more than 9.3% so far this year. Its first-half performance was the worst in five decades. The dollar had been on track for its ninth day of gains, its longest winning streak since October, before the Powell news hit the wires.

Legal questions aside, the dollar is likely to bear the most significant brunt of market reaction to any attempt to remove the Fed Chair, given the size and depth of the global foreign exchange market and the speed at which trades can be executed.

Trump’s desire for lower interest rates, which run contrary to his assertion that the economy is advancing at the fastest pace in the world, would add further complexity to the broader dollar trade.

A pliant Fed Chair, willing to lower rates in the face of quickening inflation and tariff risks, would raise serious questions over the central bank’s independence.

A likely rally in short-dated Treasury bonds, which would drive yields lower in anticipation of near-term Fed rate cuts, would then be offset by a selloff in longer-dated paper amid concerns that inflation pressures would go unchecked.

The combined volatility would quickly flow through to U.S. dollar positioning, particularly from foreign investors.

“Powell’s removal or resignation is likely to trigger a new round of severe downward volatility in the dollar, and the damage would be there to stay,” says Padhraic Garvey, ING’s head of Americas research.

“The value of the dollar as a reserve currency fundamentally lies in Fed independence, meaning large outflows from the dollar would likely be justified,” he added. “To us, that looks like an even worse combination for the dollar than ‘Liberation Day.’”

Saxo Bank’s John Hardy, global head of macro strategy, says a “complicit Fed Chair” determined to engineer lower short-term interest rates despite inflation pressures would be “toxic stuff long term for the U.S. dollar.”

Investors would seem to agree. Bank of America’s monthly Fund Manager Survey, which tracks positioning from global investors who control around half a trillion in assets, shows the biggest overweight to holdings in the euro since January of 2005.

Trade war risks remain their biggest concerns, the July report noted, with faster inflation and capital flight leading to further dollar declines ranked second and third, respectively.

“’Short US dollar’ is the most crowded trade for the first time in FMS history (per 34% of investors),” the report stated, replacing a three-month run for “long gold” and a near two-year run for “long Magnificent 7.”

Perhaps for good reason.

Write to Martin Baccardax at martin.baccardax@barrons.com