Trump's Criticism of Powell Leads to 10.48% Dollar Decline

President Trump's ongoing criticism of Federal Reserve Chair Jerome Powell has led to a significant decline in the value of the U.S. dollar. The dollar has lost 10.48% of its value against other currencies on the DXY index year to date, a substantial drop given that currencies typically move in fractions of a percent. This morning, the dollar was down 0.55%.

Trump's attacks on Powell have raised concerns among investors about the independence of the Federal Reserve. Powell is seen as a cautious economist who operates independently of Trump's political desires. However, Trump has repeatedly insulted Powell and called for lower interest rates, which Powell has declined to do. Trump's tariff policy is generally regarded as inflationary, and lowering interest rates could exacerbate inflation, which is currently above 3%.

Investors are nervous that U.S. monetary policy might end up in the hands of someone who doesn't understand or care about inflation. This could set up an extraordinary conflict between the Fed chair and the rest of the Federal Open Market Committee, which sets the target interest rate. According to a note published by UBS analyst, the greatest threat to policy independence would be someone who was not an obvious political puppet but was swayed by Trump's instructions.

The bond market is also feeling the impact of Trump's actions. Investors are fleeing long-dated U.S. bonds due to fears that Trump's policies will add more federal debt than the U.S. economy can support. Net outflows from long-dated bonds hit $11 billion in Q2, the swiftest rate since the height of the Covid-19 pandemic. The bond market supports the value of the dollar, so if bond prices decline, the USD will follow.

Despite the turmoil in the currency and bond markets, U.S. stocks remain resilient. The S&P 500 is near record highs, with futures trading up 0.36% this morning. This suggests that investors are not yet convinced that Trump's actions will have a lasting impact on the economy. However, the situation remains fluid, and further developments could lead to increased volatility in the markets.