Dollar set for monthly drop on growing US rate cut wagers

SINGAPORE, August 30 ------ The dollar wobbled on Friday, poised for a 2% drop in August against major currencies on rising odds of the Federal Reserve cutting interest rates next month, while worries about the threats to the U.S. central bank's independence linger.

President Donald Trump's campaign to exert more influence over monetary policy, including attempts to fire Lisa Cook, one of the Fed's governors, has weighed on the dollar. Cook filed a lawsuit claiming Trump has no power to remove her from office. The legal battle is the latest chapter in Trump's attempts to reshape the central bank after repeatedly criticizing the Fed and its Chair Jerome Powell for not cutting interest rates. "If markets perceive the FOMC’s independence as compromised, inflation expectations could become unanchored, driving long-term interest rates higher," said Carol Kong, currency strategist at Commonwealth Bank of Australia.

Currency markets were tentative on Friday, with the euro easing a bit to $1.16625, but on course for a 2% gain in August. Sterling last bought $1.3509, and the Japanese yen fetched 147.01 per dollar. The Australian dollar was steady at $0.6533, set for a 1.6% gain in the month, while China's yuan hit its strongest level in 10 months against the dollar as steady central bank fixings and a hot domestic stock market drive the currency higher.

The dollar index, which measures the U.S. currency against six major peers, was at 97.917, on course for a 2% decline for the month. The index is down nearly 10% this year as erratic U.S. trade policies drove investors towards alternative assets.

Trump's push to place hand-picked, dovish-leaning candidates on the central bank's decision-making committee has pressured short-term yields lower, while longer-term yields have risen. "While President Trump may be able to lower the Fed Funds rate by influencing the makeup of the interest rate setting committee, longer-term interest rates may not respond in kind," said CBA's Kong.

A politically influenced Fed that keeps interest rates lower than it otherwise might could result in higher inflation and reduce foreign demand for the debt due to credibility fears, while a worsening fiscal outlook is also expected to weigh on longer-dated bonds. The yield curve differential between two-year and 10-year notes was last at 57 basis points, after hitting the steepest level since April earlier in the week. Still, market reaction to the battle between Trump and the Fed's Cook has been relatively muted, with slight dollar selling and curve steepening. "The market is looking through the amplified theatre and noise with regard to the robust opinions circulating regarding the independence of the US Fed," said George Boubouras, head of research at K2 Asset Management. "The market is not complacent about these developments; it is simply being pragmatic."

Source: reuters.com