The core logic of the recent dollar asset sell-off: Trump puts pressure on Powell

Source: Wall Street Insights

The crisis of the Federal Reserve's independence has triggered a massive sell-off of US dollar assets. A series of remarks by Trump threatening to fire Jerome Powell have given traders a reason to sell the US dollar. Investors are closely assessing whether Trump can really fire Powell.

Trump Issues an "Ultimatum" to Powell

Investors are evaluating the risk of Powell's dismissal. After Kevin Hassett, the director of the White House National Economic Council, declared last Friday that Trump was studying whether firing Powell was an option, the decline in US dollar assets widened. On Monday this week, the US dollar index fell to a three-year low. According to Bloomberg, after Hassett's speech, several hedge funds started selling the US dollar on Monday.

Just as the European Central Bank is accelerating the pace of interest rate cuts, Trump has directed his anger at Powell. He publicly criticized the Federal Reserve Chairman three times within 24 hours, threatening to "fire him if he doesn't cut interest rates" - which has injected a new round of uncertainty into the financial market.

According to media reports, Trump launched a series of attacks on social media on Thursday: "The Federal Reserve Chairman Jerome Powell, who is always too late and wrong, released a report yesterday. This is another typical and complete 'chaos'! Powell should have lowered interest rates long ago, just like the European Central Bank did, but he should definitely lower them now. The sooner Powell leaves, the better!"

Just a few hours later, Trump issued two consecutive warnings during the afternoon trading session of the US stock market. He bluntly said, "If I demand it, he has to go," and emphasized that "the Federal Reserve should cut interest rates. This is what the Fed owes to the American people."

The potential prospect of Powell stepping down has also strengthened the expectation that the Federal Reserve will further cut interest rates. This has led to an expansion of the yield gap between long-term and short-term US Treasury bonds, and the US Treasury yield curve has become steeper. Statistics show that the yield spread between 30-year Treasury bonds and 2-year Treasury bonds has risen for 9 consecutive weeks, setting the longest consecutive increase on record, and the gap has reached the highest level since 2022.

However, considering the market chaos caused by the tariff conflict, there may not be a need for a reason to sell the US dollar: Gareth Berry, a strategist at Macquarie in Singapore, warned:

The latest catalyst for the US dollar sell-off may be the pressure Powell is facing, but the reality is that there is no need for further excuses to sell the US dollar.

What has happened in the past three months is enough to prove the sustainability of the US dollar sell-off, and it may continue for several more months.

Can Trump Really Fire Powell?

Amid the intense market volatility, traders are seriously considering a key question: Can Trump really fire Powell?

Legal scholars generally believe that the president cannot easily fire the Federal Reserve Chairman. Section 10 of the Federal Reserve Act clearly states that members of the Board of Governors of the Federal Reserve (the Chairman is one of them) can only be removed from office by the president for "cause." Legal scholars usually interpret "cause" as serious misconduct or abuse of power.

The existing legal framework is designed to ensure that the Federal Reserve's policies are independent of short-term political pressure.

However, the ruling of the US Supreme Court on the "Trump v. Wilcox" case in May may change the rules of the game. Krishna Guha, an analyst at Evercore ISI, warned that this ruling may undermine the independence of the Federal Reserve and other government agencies and expand the president's power to fire officials of institutions that were originally considered independent of political influence.

Wall Street Warns: The Risk of Market Collapse is Imminent

According to media reports, US Treasury Secretary Steven Mnuchin has issued warnings to senior White House officials several times that any attempt to fire Powell could trigger severe turmoil in the financial market.

Even Elizabeth Warren, a Democratic senator who often criticizes Powell, has rarely expressed her support for the independence of the Federal Reserve:

Although I often have conflicts with Powell on issues such as regulations and interest rates, please understand this: If the President of the United States can fire Chairman Powell, it will cause the US market to collapse.

Kathy Jones, Chief Fixed Income Strategist at the Schwab Center for Financial Research, bluntly said:

This is something that would not be done in major developed countries. The more forcefully he pushes this, the worse the situation will be.

Even if investors approve of Powell's potential replacement, the damage has already been done - bond yields will rise and the US dollar will fall. Because there will be no credibility left.

Goldman Sachs warns that if the Federal Reserve becomes a political tool and succumbs to political pressure by sharply cutting interest rates regardless of inflation risks, it will lead to the depreciation of the US dollar, the collapse of real interest rates, and then drive the price of gold to soar.

Goldman Sachs points out that historically, whenever a central bank loses its independence, it will trigger a confidence crisis in the legal tender, resulting in a significant increase in the price of gold. In its extreme forecast, if market concerns about the subordination of the Federal Reserve intensify, the central bank's demand for gold as a hedge rises to 110 tons per month, the US falls into a recession, and the holdings of exchange-traded funds (ETFs) return to the peak during the pandemic, the price of gold could approach $4,500 per ounce by the end of 2025.

For investors, the storm surrounding the independence of the Federal Reserve is far from over, and its impact on US dollar assets may have just begun.

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