The Fed’s Fragile Independence and What It Means for the Dollar

The U.S. dollar is under renewed pressure and this time, it’s not just about rates or data surprises. The bigger issue now is institutional. Markets are waking up to the idea that the independence of the Federal Reserve long considered a foundational strength of the U.S. financial system may be at genuine risk. That’s a big deal, and investors are reacting accordingly.

This week opened with the dollar in retreat across the board, and USD/JPY finally dipped below the 140.00 mark (that I’ve been telling for weeks and weeks) for the first time since September 2024. That move isn’t happening in isolation. Equities are getting sold off aggressively, and long-dated Treasury yields are grinding higher again, with the 30-year yield climbing past 4.90%. In a span of 24 hours, we’ve seen the dollar, stocks, and bonds all get hit what I like to aptly call a “triple sell-off.” It’s a sign of broader unease: the kind that typically points to systemic uncertainty, not just cyclical volatility.

USDJPY H4 Chart 

Trump’s Shadow Over the Fed

This all links back to comments made by former President Donald Trump, who has been ramping up pressure on Fed Chair Jerome Powell. Trump’s dissatisfaction isn’t new, but his rhetoric has taken a sharper edge lately. His latest remark that Powell’s tenure “cannot end soon enough” has lit a fire under fears that the White House might try to intervene more directly in the Fed’s operations.

Legally, removing the Fed Chair is a high hurdle. The 1913 Federal Reserve Act protects governors with 14-year terms, and they can only be dismissed “for cause.” Still, Trump’s team is testing those boundaries. The administration has asked the Supreme Court to rule on the president’s authority to dismiss board members at other independent agencies cases that could, indirectly, clear a path to a more politicized Fed if that precedent is overturned.

National Economic Council Director Kevin Hassett hasn’t exactly poured cold water on those fears either. When asked if Powell could be removed, he said, “we’ll continue to study that.” That’s not a firm denial it’s a shot across the bow.

Markets Are Watching the Succession Race

Even if Powell isn’t fired, the battle over his successor is already in play. Treasury Secretary Scott Bessent has said the administration will intensify efforts to identify a new Fed Chair before Powell’s term expires in May 2026. Some of the names floated Kevin Warsh, Kevin Hassett, Arthur Laffer would likely be seen as aligning more closely with Trump’s economic ideology.

Warsh might bring some comfort to markets due to his prior experience and relatively orthodox views. But let’s be real: any pick that’s seen as too close to the White House could spark renewed volatility, particularly if they’re expected to back political goals over economic stability.

There’s also concern that political pressure could extend to Fed policies that go beyond interest rates like the use of dollar swap lines, which are a crucial liquidity tool for global markets. ECB President Christine Lagarde was asked about this last week, and while she didn’t answer directly, the question itself underscores growing international nervousness about U.S. policy reliability.

Geopolitical Undercurrents: Tariffs, Trade, and Global Positioning

Overlaying all this is the reality that Trump’s tariff-driven strategy what he’s dubbed “Liberation Day” has made markets more reactive to risk from Washington. With tariffs on Chinese goods now at 145%, it’s not hard to imagine additional measures that could catch investors off guard. The sense is: if the administration is willing to push the envelope this far on trade, what else might be on the table?

And this dovetails into wider concerns about the U.S. global stance. Foreign investors are already reducing exposure to U.S. assets, not just due to rates or valuations, but due to doubts about institutional reliability and political continuity. In short, the dollar’s “safe haven” status is being chipped away not from abroad, but from within.

Bottom Line: Structural Risks for the USD

What we’re seeing isn’t just about a short-term positioning squeeze or a Fed dot plot adjustment. It’s something deeper. Structural. Political pressure on the central bank undermines one of the key pillars supporting U.S. financial credibility. And that’s happening just as the rest of the world is becoming more hesitant to absorb U.S.-centric risk.

With Powell’s term clock ticking and Trump’s influence growing, we may be looking at a much more uncertain future for Fed independence and by extension, for the dollar. The next big dollar move might not come from data it could come from a Supreme Court ruling or a press conference. The risk premium is back, and this time, it’s about trust.

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