The US Dollar’s (USD) steady rise was disrupted after Fed Chair Jerome Powell revealed grand jury subpoenas from the Justice Department, raising fears over potential threats to the Fed’s independence and triggering a sell-off in equities, Treasuries, and the USD.

Fed independence concerns rattle markets

"The dollar’s smooth appreciation trend was abruptly interrupted overnight after Federal Reserve Chair Jerome Powell said the Fed had been handed grand jury subpoenas from the Justice Department, threatening a criminal indictment over his testimony about renovation works at the central bank's headquarters. Powell has explicitly characterised this as an attack on the Fed’s independence from the Trump administration. Markets’ initial reaction agreed with that view. The combined drop in the dollar, equities and Treasuries was a reminiscence of the 'sell America' days of last spring."

"However, Treasury futures have steadied this morning, and that is the most important signal markets aren’t ready to price in a loss of Fed independence just yet, either on the view that Powell will indeed remain firm in his policy views (as he’s pledged to), the FOMC won’t be heavily affected, or that the DoJ subpoenas aren’t likely to lead to an indictment. S&P500 futures are still down 0.4%, though, and DXY -0.3%."

"Expect developments on this story to take over other macro drivers for the dollar, at least for today. The downside risks for the dollar from any indications of further determination to interfere with the Fed’s independence are substantial. Again, the bond market will be the most important barometer, both on the short end of the curve if markets price back in more rate cuts, or in the long end with potential stress signs on independence risks. A sharp steepening of the curve could take the dollar on a fall."