Dollar drops in choppy trading as Trump denies plans to fire Fed's Powell

By Karen Brettell

NEW YORK (Reuters) -The U.S. dollar fell but rose off its lows on Wednesday after U.S. President Donald Trump denied news reports that he is planning to fire Federal Reserve Chair Jerome Powell.

Bloomberg reported that the president is likely to fire Powell soon. A source also told Reuters that Trump is open to the idea of firing Powell and polled some Republican lawmakers on firing Powell and received a positive response.

But Trump said that the reports are not true.

"I don't rule out anything, but I think it's highly unlikely unless he has to leave for fraud," Trump said, a reference to recent White House and Republican lawmaker criticism of cost overruns in the $2.5 billion renovation of the Fed's historic headquarters in Washington.

Removing Powell before his term ends in May would be negative for the dollar as it would undermine credibility in the U.S. financial system and the dollar as a safe-haven currency. 

"What can kill the value of the U.S. dollar, what can absolutely destroy faith in the U.S. dollar, is attacking in any way, shape, or form the independence and authority of the Federal Reserve," said Juan Perez, senior director of trading at Monex USA in Washington.

Trump has railed against Powell for months for not easing rates, which he says should be at 1% or lower.

The dollar index, which measures the greenback against a basket of currencies, including the yen and the euro, was last down 0.25% on the day at 98.34, with the euro up 0.3% at $1.1633.

Against the Japanese yen, the dollar weakened 0.7% to 147.82. Sterling strengthened 0.24% to $1.3411.

If Trump were to fire Powell the markets would likely see a larger negative reaction in the dollar, said Francesco Pesole, FX strategist at ING in London.

"Euro/dollar is at $1.17 and should be trading higher on this because the implications are massive. Markets are still not fully pricing this all in. You would expect that if Powell is removed today then the Fed cuts in September," he said.

The single currency got as high as $1.1721 on Wednesday. Fed funds futures traders are now pricing in 47 basis points of cuts by year-end, up from 44 basis points before the news reports.

The dollar gained earlier against the euro as traders bet that the U.S. central bank may be less likely to cut rates two times this year following an uptick in consumer prices in June, even though producer price inflation data on Wednesday was steady.

U.S. producer prices were unexpectedly unchanged in June as an increase in the cost of goods because of tariffs on imports was offset by weakness in services.

Tuesday's release showed U.S. consumer prices increased by the most in five months in June amid higher costs for some goods, suggesting that Trump's tariffs were starting to have an impact on inflation.

"Yesterday's reaction to the inflation data was very positive for the U.S. dollar overall," said Eric Theoret, FX strategist at Scotiabank in Toronto. 

Investors continue to focus on tariffs ahead of an August 1 deadline when many trading partners face higher trade levies.

Trump said on Wednesday the U.S. will probably "live by the letter" on tariffs with Japan and may have another trade deal coming up with India, following his announcement of an accord with Indonesia on Tuesday.

In Japan, investors are focused on a potential power shift in upper house elections this weekend that could strain already frail finances, with long-dated yields soaring to all-time highs as the vote nears.

In cryptocurrencies, bitcoin gained 2.82% to $119,761 but held below a record high of $123,153 reached on Monday.

(Reporting by Karen Brettell; Additional reporting by Dhara Ranasinghe; Editing by Nick Zieminski, Chizu Nomiyama and Sandra Maler)