By Gregor Stuart Hunter
SINGAPORE (Reuters) -The dollar skidded in a volatile session on Tuesday after U.S. President Donald Trump said he was removing Federal Reserve Governor Lisa Cook from her position, seen by markets as a fresh jab at the central bank’s independence.
The dollar index fell as much as 0.4% before recovering after Trump made the announcement in a letter to Cook that he posted on social media.
An index measuring the greenback’s strength against a basket of six currencies was last 0.1% lower at 98.368. The pullback came after the U.S. currency had registered its biggest daily gain of the month on Monday.
“Markets aren’t panicking, but they are recalibrating, earlier rate cuts look more likely after Cook’s removal,” said Charu Chanana, chief investment strategist at Saxo in Singapore.
“But this isn’t just about rate cuts, it’s about Fed independence and the growing institutional risks in the U.S.”
Trump said in the letter to Cook he was firing the governor over alleged improprieties in obtaining mortgage loans. In response, Cook said Trump has no authority to fire her from the central bank, and she will not resign.
The unprecedented move marks a sharp escalation of Trump’s battle against the Fed, which he blames for not lowering interest rates quickly, and intensifies investor worries about the U.S. central bank’s independence.
“Trump’s move to fire Lisa Cook will cast a pall on Fed independence and could weigh on the dollar and U.S. Treasuries,” said Vasu Menon, managing director of investment strategy at OCBC. “However, don’t expect major market moves as Trump’s action is somewhat unprecedented and may be challenged in U.S. courts,” he added.
The yield on the two-year U.S. Treasury bond was last down 1.3 basis points to 3.717% after the move, while the yield on long-dated 30-year bonds rose 4.7 basis points to 4.936%. The interest rate differential between two- and 10-year Treasury bonds hit a one-month high of positive 58.7 basis points.
Traders are pricing in an 83.3% probability of a cut at the Fed’s September meeting, little changed from a week ago, according to the CME Group’s FedWatch tool.
Against the yen, the dollar traded at 147.845 yen, in line with late U.S. levels. The euro tacked on 0.1% in Asia, last fetching $1.1629, reversing some losses after France’s main opposition parties said they would not back a confidence vote, over Prime Minister Francois Bayrou’s planned budget cuts, increasing the prospect of political instability.
The offshore yuan changed hands at 7.1547 yuan per dollar, appreciating just shy of 0.1% and trading near the strongest level in a month, as a Chinese stock rally gathered steam.
The Australian dollar slipped 0.1%, fetching $0.6479, after the Reserve Bank of Australia’s minutes for its August meeting said the central bank judged further policy easing would likely be needed over the coming year. The kiwi slipped 0.2% to $0.5839.
Sterling traded at $1.3453 in volatile trade, giving up early gains made after news of Trumps’s move against the Fed broke.
Cryptocurrencies fluctuated between gains and losses after several days of choppy trading, with bitcoin last up 0.5% and attempting to break a three-day losing streak, while ether climbed 1.9%.
(Reporting by Gregor Stuart HunterEditing by Shri Navaratnam and Sam Holmes)
