Dollar under strain as Trump’s threat to fire Fed chief shakes market confidence

The US dollar is wobbling as investors brace for what could be a historic political move, the potential dismissal of Federal Reserve Chair Jerome Powell by US President Donald Trump. The speculation has sent tremors through global markets, casting a cloud over the Federal Reserve’s independence and the dollar’s credibility as a global safe-haven currency.

Trump renews attack on Powell, keeps firing door open

In a week already loaded with trade anxieties and political uncertainty, the dollar slid overnight following reports that President Trump is considering removing Powell from office before his term ends in May 2026. According to Reuters, while Trump denied the reports, he notably refused to rule out the possibility. “I don’t rule out anything, but I think it’s highly unlikely unless he has to leave for fraud,” Trump said.

The remark follows Republican criticism over a $2.5 billion renovation project at the Fed’s headquarters in Washington. As per Bloomberg, Trump has been sounding out Republican lawmakers about removing Powell and reportedly received a favourable response. His ongoing frustration with Powell stems from what he calls an unnecessarily tight monetary policy. Trump has insisted that interest rates should be 1 per cent or even lower to support economic growth ahead of the 2026 elections.

Investors on edge: Fed credibility, inflation risks loom

The stakes are high. Removing Powell would be unprecedented and would erode the central bank’s autonomy, a key pillar of confidence in US financial markets.

“If that comes to fruition, you’re going to see a much weaker dollar than we’re already expecting,” said Mahjabeen Zaman, head of FX research at ANZ, in a company podcast, as quoted by Reuters. “Such an event… will raise questions for Fed independence and credibility, so I think it’s only going to be an increase in volatility.” As per Reuters, Zaman added that a more dovish Fed under pressure from the White House could usher in a return of inflation and negative real yields on US Treasuries, both of which would weigh heavily on the greenback.

Dollar under pressure, global currencies mixed

The US dollar index, which measures the greenback against six major peers, hovered at 98.384 after falling 0.3 per cent on Wednesday. The dollar clawed back 0.2 per cent to trade at 148.14 yen after a 0.6 per cent slump overnight.

The euro was little changed, down 0.01 per cent to $1.1632, while the British pound edged 0.1 per cent lower to $1.3409.

Trade tensions and political shifts weigh on markets

Beyond Fed jitters, markets remain preoccupied with trade policy. As per Reuters, investors are closely watching the August 1 deadline, when higher US tariffs are set to hit several trading partners. President Trump said Wednesday that the US would “probably live by the letter” of its tariff agreement with Japan but also hinted at more deals on the horizon. He announced a trade accord with Indonesia earlier this week and teased a possible agreement with India in the near term.

In Japan, political uncertainty ahead of this weekend’s upper house elections is fuelling further volatility. Investors are concerned that a shift in power could jeopardise the country’s already fragile fiscal position. Long-dated Japanese government bond yields have surged to record highs ahead of the vote. As Trump keeps markets guessing over Powell’s fate, the dollar faces a critical test of faith. For now, all eyes are on Washington and on a Fed chair who may be fighting to keep both his job and the central bank’s reputation intact.