Dollar weakness due to threat to Fed independence – Commerzbank

The US president's attacks on Fed Chair Jay Powell are intensifying. And the dollar is weakening accordingly. The President of the United States is not well versed in conventional forms of politeness. We also know that he prefers a loose monetary policy. Don't be confused by the smokescreens put up by his economic advisor Kevin Hassett: Of course, this preference is neither new nor unique. What is new and unique, however, is that the US President really might fire Chair Powell, unlike during his first term in office. Hassett has confirmed that the White House is considering this, Commerzbank's Head of FX and Commodity Research Ulrich Leuchtmann notes.

Fed independence under fire

"Because such a move would obviously not be taken because of any misconduct on Powell's part, but would be motivated by the President's dissatisfaction with the Fed's monetary policy, it would spell the end of the US central bank's independence. Monetary policy could then only be conducted in a way that suits the man in the White House."

"I can guess what many of our readers are asking at this point: How much further can the US dollar weaken? We recently announced 1.15 as our target for the EUR-USD exchange rate (the measure that is the relevant benchmark for dollar weakness or strength for the majority of our readers). This is roughly the level at which EUR-USD is currently trading. Admittedly, we expected 1.15 for a later date."

"That option is no longer available. If the FOMC actually lowers the key interest rate corridor on May 7, it must expect this to be interpreted as a clear signal that it is bowing to political pressure. The damage would be immense and lasting. It must now respond 'with a bang' – even though FOMC members must realize that the US president is also unlikely to back down. In short, because the de-escalation scenario seems implausible, the danger for the US dollar is so acute."