Dollar Faces Political Headwinds as Fed Independence Comes Under Threat

The greenback suffered a broad-based selloff to start the week, sliding against all major currencies as political interference concerns surrounding the Federal Reserve gripped markets. Comments from National Economic Council Director Kevin Hassett suggesting President Trump is exploring the legal basis to remove Fed Chair Jerome Powell triggered a sharp recalibration of USD exposure among hedge funds and asset managers.

This isn’t just another Washington headline it’s a red flag traders can’t afford to ignore.

Gold surged to a record high amid renewed haven demand, while U.S. Treasuries sold off and the yen advanced to levels last seen in September. The euro and Swiss franc led gains among G-10 currencies, with the euro briefly touching a three-year high. These price actions highlight mounting concerns over potential erosion in the credibility of U.S. monetary policy and the rising appeal of diversification plays in an increasingly politicized global economy.

Political Risk Premium Hits the Dollar

President Trump’s frustration with the Fed’s reluctance to cut rates is now spilling into markets. His social media post last week, declaring Powell’s removal “can’t come fast enough,” sparked a wave of speculation over the central bank’s independence a principle long viewed as a cornerstone of financial market stability. If the Fed becomes a political tool, the dollar loses its anchor, this could trigger a longer-term reallocation away from USD assets.

The market reaction is already underway. Chinese investors have reportedly reduced their holdings of U.S. Treasuries, rotating into European sovereign bonds and other defensive assets. With America’s “exceptionalism trade” unwinding where U.S. assets were bid on growth and policy divergence the dollar’s slide reflects a deeper structural shift.

Fed Policy: Still Hawkish, but Fractured

While the White House agitates for rate cuts, Fed officials remain cautious. San Francisco Fed President Mary Daly reinforced that rates may stay higher for longer if inflation persists  though she acknowledged the door remains open to easing later in the year. Meanwhile, Chicago Fed’s Austan Goolsbee warned explicitly against undermining the central bank’s independence, calling it essential to preserving economic stability.

The mixed tone underscores internal divisions within the Fed, but more importantly, highlights a broader challenge for traders: policy signaling is becoming harder to trust.

Safe Havens in Focus: Rotation Has Begun

• Gold: Prices hit a record high, reinforcing its role as a go-to hedge amid political and currency risk.
• EUR & CHF: Beneficiaries of safe-haven flows, with the euro buoyed by better-than-expected inflation data and stability in European yields.
• JPY: Strengthened as both a haven and as Japanese investors reassess U.S. exposure.
• Global Bonds: European and Japanese sovereigns are seeing renewed demand as traders diversify away from Treasuries.

Trade Talks: Thin Ice Beneath Diplomatic Smiles

Beyond Fed politics, traders are eyeing the unresolved trade dynamics:

• Japan-US Talks: Initial progress has cooled short-term fears, but questions remain about the depth of any agreement.
• China: Beijing has outlined multiple preconditions for re-entering negotiations, warning third-party nations not to side with Washington in a way that undermines Chinese interests.
• Tariff Overhang: With shipping routes now a target of U.S. levies, risks of broader trade war escalation remain elevated.

SARACEN Client Playbook: What to Watch Next

1. USD Repricing: The dollar is now trading with a political risk discount. Expect further volatility as legal and constitutional discussions around Powell’s role develop.
2. Asset Rotation: The flow away from Treasuries to European bonds, JGBs, and gold should not be seen as a blip it’s a developing macro theme.
3. Fed Independence Watch: Any move by the White House to interfere with Fed leadership could cause significant dislocations in rate expectations and risk sentiment.
4. China Response Risk: Monitor Beijing’s next moves closely. Any retaliatory steps or alignment shifts with third-party nations could jolt emerging markets and commodities.

Final Word:

For traders, this isn’t just about Powell. It’s about the foundation of modern monetary credibility and what happens when that foundation cracks. As markets reassess both macro fundamentals and political stability, the smart money is rotating, repositioning, and preparing for regime change in both narrative and policy.

→ Stay macro-aware. SARACEN MARKETS is your edge when politics and policy collide.