US dollar, Treasuries jolted after Trump fires Fed governor

TOKYO – The US dollar skidded in a volatile session on Aug 25 after President Donald Trump announced he was removing Federal Reserve governor Lisa Cook, the latest in a series of attacks on the US central bank’s independence that is undermining confidence in US assets.

Asian shares followed declines on Wall Street, with Japan’s Nikkei and Hong Kong’s Hang Seng Index closing down 1 per cent as prospects for a Fed rate cut in September became less certain. US stock futures retreated.

The dollar index fell as much as 0.4 per cent before recovering after Mr Trump made the announcement in a letter to Dr Cook that he posted on social media.

An index measuring the greenback’s strength against a basket of six currencies was last 0.1 per cent lower. The pullback came after the US currency had registered its biggest daily gain of the month on Aug 25. The US currency was little changed against the Singapore dollar at 1.286.

“Markets aren’t panicking, but they are recalibrating; earlier rate cuts look more likely after Cook’s removal,” said Ms Charu Chanana, chief investment strategist at Saxo in Singapore.

“But this isn’t just about rate cuts, it’s about Fed independence and the growing institutional risks in the US.”

Mr Trump said in the letter to Dr Cook that he was firing the governor over alleged improprieties in obtaining mortgage loans. In response, Dr Cook said Mr Trump has no authority to fire her from the central bank, and she will not resign.

The unprecedented move marks a sharp escalation of Mr Trump’s battle against the Fed, which he blames for not lowering interest rates quickly, and intensifies investor worries about the US central bank’s independence.

“Trump’s move to fire Lisa Cook will cast a pall on Fed independence and could weigh on the dollar and US Treasuries,” said Mr Vasu Menon, managing director of investment strategy at OCBC. “However, don’t expect major market moves as Trump’s action is somewhat unprecedented and may be challenged in US courts,” he added.

The yield on the two-year US Treasury bond was last down 1.3 basis points to 3.717 per cent after the move, while the yield on long-dated 30-year bonds rose 4.7 basis points to 4.936 per cent. The interest rate differential between two- and 10-year Treasury bonds hit a one-month high of positive 58.7 basis points.

Traders are pricing in an 83.3 per cent probability of a cut at the Fed’s September meeting, little changed from a week ago, according to the CME Group’s FedWatch tool.

The US President has regularly threatened to fire Fed chairman Jerome Powell, who was nominated by Mr Trump during his first term in the White House and then nominated for a second term by then President Joe Biden.

Mr Trump, who lacks the legal authority to fire the Fed chairman except “for cause”, has backed away from that threat as Mr Powell gets closer to the expiration of his term as Fed chief in May 2026.

Dr Cook’s exit could speed up the President’s reshaping of the Fed. Her term had been due to end in 2038.

“Removing Cook increases concerns over Fed independence, assuming Cook has no legal recourse,” said Mr Rodrigo Catril, a strategist at the National Australia Bank.

“If Trump succeeds, then this means he could potentially have four board members aligning with his view. Whether these board members respect Fed independence and adhere to the Fed’s dual mandate remains to be seen.”

REUTERS, BLOOMBERG