The dollar is fluctuating as markets worry about threats to the Fed’s independence

The dollar held on to losses on Tuesday after the Trump administration opened a criminal investigation into Federal Reserve Chairman Jerome Powell, a move that threatens the central bank’s independence and confidence in US assets. Investors were still trying to come to grips with news of the investigation unveiled late Sunday, a move that drew condemnation from former Fed chiefs and marked a dramatic escalation in the U.S. president’s campaign to pressure the central bank to cut interest rates more quickly.

The market response was to sell off the dollar and US government bonds, while the turmoil also prompted some investors to seek safety in gold. The sell-off, however, was much more measured than the one that followed Trump’s sweeping tariffs last April.“The episode was mild, with fractional losses in both the USD and UST, as markets likely think this is a threat that will blow over,” said Vishnu Varathan, Mizuho’s head of macro research for Asia ex-Japan.

The euro was steady at $1.1663 in early trading in Asia, having risen as much as 0.5% in the previous session, while the pound was similarly little changed at $1.3463, maintaining Monday’s gain of 0.47%.

The Swiss franc drew additional safety bids and was slightly stronger at 0.7974 per dollar, while the dollar index was last at 98.92, having suffered its worst day in three weeks in the previous session.

“The picture for the dollar is somewhat mixed,” said Sim Moh Siong, FX strategist at OCBC. “In terms of what the Fed should do, the Fed should be more reluctant to cut rates, against data pointing to the resilience of the economy… but there is also the question of what the Fed would ultimately do.

“If political pressure on the Fed increases, the Fed could ease and possibly cut rates far beyond what the economy warrants.”

While the Trump administration’s latest move has done little to boost market expectations for two more Fed cuts this year, it raises questions about the autonomy of the central bank, a foundation of U.S. economic policy and a cornerstone of the financial system.

Fitch Ratings said Monday it views the Fed’s independence as a key supporting factor for U.S. Treasury bonds’ AA+ rating.

U.S. Treasury yields fell slightly on Tuesday from the previous session’s gains, with the benchmark 10-year yield at 4.1713%.

The two-year yield remained near Monday’s three-week high at 3.5323%. [US/]

YEN WEAKNESS CONTINUES

In other currencies, the yen followed its own path, pressured by the possibility of snap elections at home.

Japanese Prime Minister Sanae Takaichi may call an early general election, the head of her party’s coalition partner said on Sunday, after media reported she was considering a vote in February.

The yen fell to a one-year low of 158.285 per dollar, while Japanese government bonds (JGBs) were also under selling pressure.

Japan’s Finance Minister Satsuki Katayama said she and U.S. Treasury Secretary Scott Bessent shared concerns about what she called the recent “unilateral depreciation” of the yen. “Markets are likely to factor in a scenario where Takaichi’s coalition wins more seats in the powerful lower house, and therefore that will increase its ability to further ease fiscal and possibly monetary policy,” said Carol Kong, currency strategist at the Commonwealth Bank of Australia.

“So that’s the main reason why the yen is on sell-off right now, due to this speculation.”

Elsewhere, the Australian dollar was flat at $0.6710, while the New Zealand dollar rose 0.05% to $0.5775.

A private survey showed on Tuesday that Australian consumer confidence fell in January as households grappled with renewed interest rate swings and an uncertain economic outlook.

In addition, a private think tank said the same day that business confidence in New Zealand improved in the fourth quarter and is now at its highest level since March 2014.