The U.S. Dollar’s Long-Term Weakness Amid Trump’s Pressure on the Fed

The U.S. dollar’s recent weakness is not merely a short-term fluctuation but a symptom of a deeper structural shift: the erosion of Federal Reserve independence under President Donald Trump’s aggressive political maneuvering. By attempting to remove Governor Lisa Cook from the Fed board and replacing her with allies critical of the central bank’s stimulus policies, Trump has ignited a constitutional and economic firestorm. This move, framed as a legal exercise of presidential authority, has instead exposed the fragility of the Fed’s institutional credibility—a cornerstone of global financial stability [1].

The Dollar’s Decline: A Market Response to Policy Uncertainty

The U.S. Dollar Index (DXY) has plummeted by 2% in August 2025, with a 0.33% drop on August 26 alone following Trump’s abrupt dismissal of Governor Cook [2]. Investors are pricing in a higher likelihood of rate cuts as the Fed’s independence is called into question. Legal challenges from Cook and bipartisan criticism of Trump’s actions have further muddied the waters, creating a “dovish policy overhang” that weakens the dollar’s appeal. Historically, the dollar thrives on perceived stability and predictable policy; today, it is undermined by the specter of political interference [3].

Bond markets have mirrored this sentiment. The yield curve has steepened, with 30-year Treasury yields climbing to 4.9% while 2-year yields fell to 3.70%, reflecting divergent expectations for short-term rate cuts and long-term inflation risks [4]. This divergence is not just a technicality—it signals a loss of confidence in the Fed’s ability to anchor inflation expectations. When central banks lose their independence, markets demand higher compensation for inflation risk, a dynamic now playing out in Treasury yields [5].

The Broader Implications: Fiscal Dominance and Global Fragmentation

Trump’s strategy to reshape the Fed’s composition aligns with a broader trend of “fiscal dominance,” where political agendas override monetary discipline. By pushing for a more dovish FOMC, Trump aims to lower borrowing costs for his administration’s fiscal policies, but this risks entrenching inflationary pressures. Tariff hikes and stimulus measures, combined with a politicized Fed, could create a self-fulfilling cycle of higher inflation and weaker dollar demand [1].

Globally, the U.S. dollar’s weakening has accelerated fragmentation in bond markets. While U.S. yields reflect domestic uncertainty, European markets—particularly in France—show divergent trends due to their own political instability and fiscal challenges [4]. This fragmentation underscores a world where investors are no longer willing to treat the U.S. dollar as a risk-free asset, a shift that could redefine capital flows and currency valuations for decades.

Conclusion: A New Era of Risk

The U.S. dollar’s long-term weakness is not inevitable, but it is increasingly probable if the Fed’s independence continues to erode. Investors must now navigate a landscape where policy credibility is under siege, and inflation expectations are no longer anchored by institutional trust. For now, the market’s response—steepening yield curves, dollar weakness, and a flight to inflation-protected assets—suggests that the era of the Fed’s unchallenged authority is over.

**Source:[1] Trump's challenges to the Fed's independence loom over Jackson Hole symposium [https://www.atlanticcouncil.org/blogs/econographics/trumps-challenges-to-the-feds-independence-loom-over-jackson-hole-symposium/][2] Dollar set for monthly drop on growing US rate cut wagers [https://www.reuters.com/world/africa/dollar-set-monthly-drop-growing-us-rate-cut-wagers-2025-08-29/][3] Trump vs the Federal Reserve: What it means for the US [https://www.fxstreet.com/finance/the-us-dollar-under-pressure-what-does-the-future-hold-after-donald-trumps-attacks-on-the-fed-202508281356][4] Yield Curve Steepening and Geopolitical Risks: Navigating Era of Uncertainty in European Bonds [https://www.ainvest.com/news/yield-curve-steepening-geopolitical-risks-navigating-era-uncertainty-european-bonds-2508/][5] Weekly fixed income commentary | 08/25/2025 [https://www.nuveen.com/en-us/insights/investment-outlook/fixed-income-weekly-commentary]