Dollar suffers as Trump pressures the Fed

Trump increases pressure on Powell

After a short Easter break, Europeans are back at their desks, but not much has changed since Thursday. US President Trump continues to act like a puppeteer, overshadowing other developments.

Last Thursday’s ECB meeting, which delivered another rate cut and kept the door firmly open for further action if needed, appears to have angered Trump further, giving him the necessary excuse to launch another attack on Fed Chair Powell. It is obvious that Trump wants lower rates and feels quite frustrated that Powell is not responding favourably to his demands, but the US President is ignoring the most important trait of the Federal Reserve System: its independence.

Consequently, one could say that Trump is trying to inflict considerable damage to the US economic outlook in order to force lower rates down the line. For example, despite commentary that the US-Japan trade negotiations are progressing well, the US side appears to be stalling in the last few days, causing a degree of unease on the Japanese side.

Fed’s Powell is resisting the pressure and the name-calling, maintaining the prevailing Fed stance of patience in order to examine the end-product of the unraveling tariff war. The Fed wishes to have sufficient information to estimate the potential impact on both the inflation and growth outlook. However, this strategy entails the risk of failing to act when needed and thus inadvertently contributing to a possible US recession.

Instead of focusing on the US economy, Powell is forced to count his allies and enemies on the board. Therefore, Powell needs the support from the FOMC to remain committed to the Fed’s dual mandate.

A plethora of Fed speakers will be on the wires today, including Regional Fed Presidents Harker, Kashkari and Barkin, and Fed Board members Jefferson and Kugler. Apart from their economic-related commentary, market participants are interested in seeing if these members come out with guns blazing to protect both Powell and the Fed's independence.

Markets’ patience is gradually running out

Despite Trump repeatedly touting his “Make America Great Again” motto, there is elevated anxiety among market participants, which is very clearly depicted in assets across the board.

While US stocks are trying to recover from yesterday's abysmal session, the sentiment remains negative. April is currently shaping up to be the worst month since September 2022, when the repeated Fed rate hikes were fueling concerns about a US recession. The traditional Dow Jones index is leading the sell-off, with the European indices once again faring better.

Maybe earnings could turn the sentiment around, with Tesla releasing its first quarter results after the US market close today, and Amazon reporting on Thursday.

Bond yields and gold rise as dollar struggles

US bond yields continue to climb higher, with the 30-year yield trading a tad below the 5% threshold, mostly reflecting the inflation threat from the tariff war. Interestingly, the US Treasury is selling 2-, 5-, and 7-year notes this week, and hence investors will be looking for any indications of the Chinese abstaining from these auctions.

The dollar is also contributing to the yields’ rise, as it continues to underperform against major currencies. Euro/dollar is hovering north of 1.1500, having touched the highest level since November 2021, but more impressively, dollar/yen has dropped to 139.88, matching the mid-September 2024 low.

But the main beneficiary of the tariff saga and Trump’s rhetoric is gold. It traded above $3,500 for the first time today, supported by strong demand from central banks, ETF buyers, and the overall reduced risk appetite.

Interestingly, bitcoin appears to also benefit from the latest risk-off reaction, ignoring equities’ weak performance. The king of cryptos has reclaimed the $88k mark, with this move also partly attributed to the new crypto-friendly SEC chair finally being sworn in.