USD: Markets unsettled after Fed served with grand jury subpoenas – Scotiabank

Markets React Sharply to Fed Subpoenas and Political Pressure

Financial markets opened the week on edge after Federal Reserve Chair Jerome Powell announced Sunday night that the central bank had received grand jury subpoenas. Powell clarified that the inquiry was connected to ongoing renovations at the Fed, but emphasized that it should be viewed against the backdrop of mounting pressure from the administration for lower interest rates, according to Scotiabank strategists Shaun Osborne and Eric Theoret.

US Dollar Drops as Stocks and Treasuries Lose Ground

Although the president denied involvement in the investigation, investors are interpreting these developments as another challenge to the Federal Reserve’s autonomy. There is also growing speculation that the president’s upcoming decision on Powell’s successor could result in a nominee perceived as more aligned with the White House. In addition, President Trump recently stated that credit card companies must limit interest rates to 10% for a year or face legal consequences, though he did not specify which law would be enforced.

The US dollar has weakened, while futures for American stocks and US Treasury prices have also declined, causing a modest steepening of the yield curve. Concerns over the Fed’s independence have prompted investors to seek safe-haven assets, with the Swiss franc outperforming other major currencies. Gold surged 1.7% to a new peak, reflecting fears that the central bank may allow the US economy to overheat, fueling inflation. These weekend events have overshadowed the upcoming US inflation reports and heightened attention on the president’s anticipated announcement regarding Powell’s replacement.

Polymarket data shows a slight increase in wagers that CEA chief Hassett could be chosen as the next Fed chair. Today’s decline in the US dollar may halt and reverse the recent gains in the DXY index. The currency’s current weakness, combined with ongoing political maneuvering in Washington, echoes the pattern seen during the early years of the Trump administration, when the DXY dropped nearly 5% between mid-January and mid-February 2018.