Investor caution remains elevated amid geopolitical tensions, unsettled global equities, and a sharp rally in gold, which has climbed more than $100 to $4865. While the US Dollar (USD) is only marginally firmer, concerns over Fed autonomy, sticky inflation, and rising yields could prompt further trimming of US asset exposure in the months ahead, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

Fed independence in focus amid rising market risks

"There is clearly still a broader sense of unease among investors who remain concerned about the Trump’s Greenland ambitions and their potential fallout. Non-core major currencies which had underperformed yesterday have improved to the top spots on the overnight FX performance table while core majors—yesterday’s leaders—have slipped. The CHF is the weakest among the majors on the day while the KRW, ZAR and MXN are the leaders. Global stocks are unsettled—mixed in Asia and lower in Europe while US futures are firmer. Bonds are also mixed but Japanese government bonds have rebounded after yesterday’s heavy losses."

"The 'tell' that heightened investor concern remains is the $100-plus gain in gold to $4865. The DXY is tracking a little higher overall but the index is hardly strong and investors clearly remain cautious on prospects; technical pointers still lean bearish. While one small Danish fund manager announced its exit from the US Treasury bond market, the risk of European investors en masse 'weaponizing' holdings of US assets amid rising tensions with Washington is low, we believe."

"But there are plenty of other risk factors out there—the president’s choice for replacing Fed Chair Powell, sticky inflation and rising bond yields and calendar risks facing elevated US equity markets in this mid-term year— that could still prompt investors to pare their exposure to the USD and/or US assets in the coming weeks and months. SCOTUS will hear arguments over the legality of President Trump’s push to fire Fed Governor Cook for cause today. That case could add to investor concerns about the Fed’s operational autonomy."