The US dollar was able to gain broadly amidst the turbulence in the bond market. This is particularly remarkable because the rise in US yields was likely not due to positive economic prospects but rather to an increasing risk premium. Most recently - back in April, for instance - the dollar suffered during a rise in US yields driven by similar fiscal concerns. The difference this time is clearly that not only the US is affected; risk premiums have increased in other developed countries as well, Commerzbank's Head of FX and Commodity Research Thu Lan Nguyen notes.

Ending the Fed's independence may not be easy for Trump

"The fact that the dollar was able to benefit in this environment shows that investors evidently have not yet lost faith in US exceptionalism - the phenomenon that the U.S. economy is more capable of navigating crises than other economies. This is evident elsewhere as well, such as in the stock market as well as in the stabilization of US dollar exchange rates in recent months. This stability persists even though the Trump administration has stoked fiscal concerns with its 'Big Beautiful Bill', imposed tariffs of 10% or higher on imports from key trading partners, and relentlessly attacked the Federal Reserve, thereby undermining the integrity of one of the US's key institutions."

"All of this seems irrational at first glance. However, we must consider the alternative: If the markets were to price in an adverse scenario where, for example, the Fed loses its independence and is forced into excessively loose monetary policy, the consequences could be potentially catastrophic - such as significant currency weakness. Few investors are likely willing to bet on such a scenario lightly, as long as hope remains that things won’t get that bad. And much still speaks to the fact that ending the Fed's independence will not be easy."

"Additionally, it won’t be obvious in the coming months how strongly the central bank will yield to political pressure, as current economic conditions increasingly justify easier monetary policy. For instance, if today’s jobs report turns out weak again, the central bankers would have good reason to lower interest rates. Whether or not the Fed is still acting independently would only become clearer if rising inflation were to call for a more restrictive monetary policy. However, as long as inflation remains moderate and the US economy continues to weaken, market participants can keep sugarcoating the Fed’s likely rate cuts for a while longer. Things will get really interesting when tariffs start to have a stronger impact on US prices though."