Powell Probe Sparks Dollar Slide as Markets Question Fed Independence
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- 2 days ago
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A Report by CYS Global Remit Counterparty Sales & Alliance Unit
USD/SGD | 1.2825 – 1.2900 |
U.S. Dollar Weakens Amid Political Tensions
Asian and European markets opened the week with cautious sentiment as the U.S. dollar slipped following confirmation of a criminal investigation involving Federal Reserve Chair Jerome Powell. The controversy, reportedly connected to his congressional testimony about cost overruns in the renovation of the Fed’s Washington headquarters, has thrown fresh uncertainty over the central bank’s independence and rattled global investors.
The U.S. Dollar Index, which tracks the greenback against a basket of six major currencies, dropped around 0.2% in early Asian trading and extended its decline to 0.4% by the start of the European session, settling near 98.46. The move marked the end of a five-day rally that had taken the index to a one-month high.
Powell stated that the Trump administration threatened him with criminal charges over the testimony, sparking immediate concern across markets that the pressure campaign could undermine the Fed’s policy autonomy. “This is about whether the Fed will be able to continue setting interest rates based on evidence and economic conditions—or whether instead monetary policy will be directed by political pressure or intimidation,” Powell said in prepared remarks released to the press.
The implications of such allegations are significant. Analysts at ING warned that “any determination to interfere with the Fed’s independence poses substantial downside risk for the dollar.” Bond markets, already volatile in the face of shifting rate expectations, could become a key barometer for investor confidence. A steepening yield curve—where long-term rates rise faster than short-term rates—might indicate heightened anxiety about U.S. institutional integrity and fiscal sustainability. Still, some strategists see limited medium-term fallout. Capital Economics noted that although this latest episode dampened what had been a strong start to 2026 for the greenback, the currency remains supported by relatively firm growth fundamentals and slower expected rate-cut trajectories compared with other major economies
Asian Markets React with Caution
Across Asia, the shockwave from Washington’s political turbulence produced a restrained reaction. Most regional currencies held steady as traders weighed the significance of the Fed probe against shifting rate-cut expectations and the latest U.S. jobs data.
The Japanese yen edged slightly higher, with the USD/JPY pair slipping 0.1% to around 157.81, though limited trading volume due to Japan’s holiday kept moves contained. The Singapore dollar was steady against the greenback, while the South Korean won outperformed, with USD/KRW falling 0.7%, making it the most active Asian currency of the session.
China’s onshore yuan (USD/CNY) was nearly unchanged, and its offshore counterpart (USD/CNH) dipped 0.1%. The modest move reflected cautious optimism that Beijing’s stimulus efforts would continue stabilizing its economy in early 2026, even as foreign investors remained wary of geopolitical risks.
Meanwhile, the Australian dollar gained 0.3% to 0.6703, buoyed by broad-based dollar weakness and stronger commodity sentiment. The Indian rupee remained largely flat as market participants awaited further signals from the Reserve Bank of India concerning potential policy easing later in the year.
Market participants noted that the current episode has reinforced a broader defensive bias in Asia. “The uncertainty surrounding the Fed chair is keeping traders risk-averse,” said a Singapore-based FX strategist. “Nobody wants to take big positions until there is clarity about the scope of the investigation or its political repercussions.”
Economic Data Reinforces Policy Expectations
Beyond the political headline, financial sentiment was also shaped by fresh U.S. labour market figures released last Friday. December’s nonfarm payrolls report showed job growth slowing more sharply than economists had forecast, suggesting that the U.S. economy may be losing momentum under tighter financial conditions.
The weaker employment print strengthened market expectations of Federal Reserve rate cuts later this year. Futures data now imply at least one additional rate reduction in 2026—potentially two—depending on inflation’s trajectory. The upcoming December consumer price index (CPI) data, due Tuesday, is expected to further refine those expectations and will serve as one of the final major indicators before the Fed’s next policy meeting at the end of January.
Analysts at ING expect the core CPI to come in slightly above consensus at 0.4% month-on-month but caution that “markets will need a clearer view on the explosive Fed development before re-entering dollar longs.” Even if inflation proves sticky, political uncertainty could temper investors’ willingness to bet on further U.S. dollar gains.
Europe’s currencies, meanwhile, benefited from the dollar’s retreat. The euro rose 0.5% to around 1.1690 against the U.S. dollar, rebounding from a one-month low, while the British pound advanced to 1.3464. The Swiss franc—typically seen as a safe haven—was the best-performing G10 currency, rising 0.7% as investors sought protection from Fed-related risks.
Caution over Panic
For now, the overarching narrative is one of caution rather than panic. Markets appear to be balancing two opposing forces: the softening U.S. data, which supports the case for rate cuts, and the more volatile political backdrop, which introduces potential downside risk to U.S. assets. Global investors are thus adopting a “wait-and-see” posture before committing to new directional trades.
Looking ahead, the immediate focus will remain on the CPI release and any subsequent public statements from Powell or administration officials. If the legal developments intensify, the currency market’s reaction could broaden beyond short-term fluctuations, challenging assumptions about the long-term stability of U.S. monetary institutions—a foundation of global financial confidence for decades. The dollar’s pullback highlights how political dynamics can abruptly redefine market expectations, particularly when they touch the perceived independence of the world’s most influential central bank. Whether the current episode proves a temporary squall or the beginning of a deeper institutional fracture will depend on both judicial clarity and the Federal Reserve’s ability to maintain its policy focus in the months ahead.
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