Dollar Weakens Amid Fed Rate-Cut Bets and Political Uncertainty

The U.S. dollar wavered on Friday, heading for a 2% decline in August against major currencies, as markets weighed rising expectations of a Federal Reserve interest rate cut next month against concerns over the central bank’s independence.

• President Donald Trump’s attempts to influence monetary policy, including firing Fed Governor Lisa Cook, have added pressure. Cook has filed a lawsuit, asserting her removal is unlawful.
• The dollar index slipped to 97.917, down nearly 10% year-to-date, reflecting investor caution amid erratic U.S. trade policies.

Major currency moves:

• Euro: $1.16625, set for a 2% gain in August.
• Sterling: $1.3509.
• Japanese yen: 147.01 per dollar.
• Australian dollar: $0.6533, up 1.6% for the month.
• Chinese yuan: strongest in 10 months against the dollar, supported by stable central bank fixings and a hot domestic stock market.

Yields and market implications:

• Trump’s push to appoint dovish candidates to the Fed has pressured short-term yields lower, while long-term yields rose.
• The two-year/ten-year yield curve stood at 57 basis points, after reaching its steepest since April earlier this week.
• A politically influenced Fed could keep rates lower than normal, potentially increasing inflation and reducing foreign demand for U.S. debt.

Rate-cut expectations:

• Fed Governor Christopher Waller signaled readiness to start cutting rates next month and expects further reductions to bring policy closer to neutral.

The market’s reaction to the Fed-Tump tension has been relatively muted, with modest dollar selling and a slight steepening of the yield curve.