Original article by Alfonso Esparza. Revised and expanded version:
Trump’s Pressure on the Fed Mounts: Is the Dollar Headed for More Weakness?
The US dollar came under renewed pressure this week as a combination of political interference, dovish central bank signaling, and slowing economic indicators continued to weigh on the currency. President Donald Trump has intensified pressure on the US Federal Reserve (Fed) to lower interest rates, fueling speculation that the institution’s independence may be increasingly at risk. This evolving dynamic has left markets uncertain about the outlook for the greenback and has broadened implications for gold, stocks, and other major currencies.
Economic Data Undermines US Dollar Strength
The US economy has displayed signs of slowing momentum, putting the Federal Reserve in a difficult position. While the US remains relatively resilient compared to other advanced economies, recent macroeconomic indicators show cracks forming:
– US Non-Farm Payrolls for May were weaker than expected, coming in at just 75,000 compared to forecasts of 180,000
– Wage growth has stagnated, with year-on-year average hourly earnings stuck at 3.1 percent
– Manufacturing activity has softened, with the ISM Manufacturing PMI sliding to 52.1, its lowest point in over two years
– Inflation pressures remain muted, far below the Fed’s 2 percent target
These data points suggest the labor market, a key point of strength in recent years, may be starting to slow down. The subdued inflation picture also gives the Fed additional room to maneuver in terms of rate cuts.
Trump’s Pressure on the Fed Escalates
President Trump has been vocal in his criticism of Federal Reserve Chairman Jerome Powell and the central bank’s monetary policy decisions. Trump has repeatedly tweeted that the Fed should lower interest rates to stimulate economic activity and weaken the dollar to keep US exports competitive.
The president’s stance contradicts the traditional arms-length relationship held between the White House and the nation’s central bank. Historically, the Fed has operated independently to maintain monetary policy credibility and stability. However, Trump’s persistent interference escalates investor uncertainty.
In a recent interview, Trump went further by stating that the Fed “doesn’t listen to him” and that their policies are hurting the US economy and stock market. He has also suggested that other countries engage in currency manipulation, putting the US at a disadvantage. As roles blur between political and monetary authorities, markets now have to recalibrate assumptions about Fed independence.
Rate Cut Expectations Surge
As a result of weak data and political pressure, markets are now pricing in multiple rate cuts from the Fed in 2019. The June Federal Open Market Committee (FOMC) meeting did not deliver a rate cut, but members significantly altered their tone, suggesting a dovish shift is underway.
Fed Chair Powell stated in his press conference that the central bank would “act as appropriate” to sustain the current expansion. Market participants interpreted this as a clear signal that the Fed is preparing to cut rates in the coming months.
According to CME FedWatch:
– The probability of a July 2019 rate cut has risen above 80 percent
– Markets foresee at least two 25-basis-point cuts before the end of 2019
– Some analysts believe there could be three cuts if conditions continue to deteriorate
These movements have been mirrored across the short-end of the yield curve. US Treasury yields have tumbled, with the benchmark 10-year note falling below 2 percent for the first time since late 2016. The inversion between the 3-month and 10-year yield curve, a historically reliable recession indicator, remains intact.
Dollar Weakness Could Continue
The US dollar index, which measures the greenback against a basket of major peers, has declined as the outlook for US interest rates grows increasingly dovish. The dollar’s safe-haven appeal is being undermined by the Fed’s willingness to accommodate additional easing and growing concerns that political dynamics are eroding policy credibility.
Notable developments weakening
Read more on EUR/USD trading.