- The dollar is under pressure due to threats to the independence of the Federal Reserve.
- The yen has weakened due to the government's political adventurism.
What is happening now is reminiscent of the hysteria that followed America's Liberation Day. Take a deep breath, exhale, and let events unfold. This is how Scott Bessent tried to calm the financial markets and the United States' European partners. He urged them not to retaliate.
However, another parallel to the events of April accelerated the liquidation of all things American. Stocks, bonds and the dollar collapsed. Admittedly, to a lesser extent compared to the announcement of global tariffs back then.
Pressure on the dollar was created by the Treasury's criticism of the Federal Reserve chairman and the hearing of Lisa Cook. The court will decide whether or not the central bank's protection against political interference, created by Congress 90 years ago, will be maintained. If Donald Trump is able to remove and appoint FOMC members at will, the federal funds rate will fall to 1% and thus collapse.
Jerome Powell's intention to attend Lisa Cook's trial outraged Scott Bessent. He accused the Federal Reserve chair of causing huge losses to the central bank due to large-scale monetary stimulus during the pandemic. Everything is bad for the executive branch: both when the Federal Reserve maintains them and when it reduces them.
The noise and dust surrounding White House policy is causing investors to abandon the dollar and other US assets. Rising Treasury yields are the result of a “sell America” attitude. Events in Japan are adding fuel to the fire in global debt markets. There, long-term bond yields have hit record levels on fears that early elections to the lower house of parliament are a political gamble by Sanae Takaichi.
Komeito, a former ally of the Liberal Democratic Party, has joined the opposition, and the policy of fiscal stimulus and low interest rates risks fueling inflation. The associated decrease in real household income will generate discontent with the current government. As a result, the yen feels out of place even in the context of a frankly weak US dollar. He cannot decide which direction to take and is stuck in indecision.
It's another matter. His new record is due, among other things, to the reluctance of the Supreme Court to rule on the legality of US tariffs. This could last until June.
He FxPro Analyst team
