Dollar Declines Amid Concerns Over Federal Reserve's Independence

Impact of Political Pressure on the Dollar

By Rae Wee

Market Reactions and Investor Sentiment

SINGAPORE, Jan 13 (Reuters) - The dollar held to its losses on Tuesday after the Trump administration opened a criminal investigation into Federal Reserve Chair Jerome Powell, a move that threatens the central bank's independence and faith in U.S. assets.

Currency Performance Overview

Investors were still trying to come to grips with news of the probe revealed late on Sunday, a move that drew condemnation from former Fed chiefs and marked a dramatic escalation in the U.S. president's campaign to pressure the central bank into cutting rates faster.

Outlook on Interest Rates and Economic Resilience

The market reaction has been to sell the dollar and U.S. Treasuries, while the unease also prompted some investors to seek safety in gold. However, the selloff was much more measured than the one that followed Trump's sweeping tariffs last April.

"The episode was mild, with losses in both USD and USTs fractional, as markets probably believe this is an act of threat that will blow over," said Vishnu Varathan, Mizuho's head of macro research for Asia ex-Japan.

The euro was steady at $1.1663 in early Asia trade, having risen as much as 0.5% in the previous session, while sterling was similarly little changed at $1.3463, holding to Monday's 0.47% gain.

The Swiss franc drew additional safety bids and was a touch stronger at 0.7974 per dollar, while the dollar index was last at 98.92, having clocked its worst day in three weeks in the previous session.

"The picture for the dollar is somewhat mixed," said Sim Moh Siong, FX strategist at OCBC.

"In terms of what the Fed should do, the Fed should be more reluctant to cut rates, against data pointing to resilience of the economy... but there is also a question as to what the Fed would do eventually.

"If the political pressure on the Fed intensifies, the Fed may turn dovish and potentially cut rates much more than warranted by the economy."

While the Trump administration's latest move has done little to alter market expectations for two more Fed cuts this year, it raises questions about the central bank's autonomy, a bedrock of U.S. economic policy and a cornerstone of its financial system.

Fitch Ratings said on Monday it views the Fed's independence as a key supporting factor for its AA+ U.S. sovereign rating.

U.S. Treasury yields eased slightly on Tuesday from the previous session's gains, with the benchmark 10-year yield last at 4.1713%.

The two-year yield held near Monday's three-week high and stood at 3.5323%. [US/]

YEN WEAKNESS PERSISTS

In other currencies, the yen was treading a path on its own, pressured by the possibility of an imminent snap election at home.

Japanese Prime Minister Sanae Takaichi may call an early general election, the head of her party's coalition partner said on Sunday, after media reported she was considering a February vote.

The yen sank to a one-year low of 158.285 per dollar, with Japanese government bonds (JGBs) similarly under selling pressure. [JP/]

Japan's Finance Minister Satsuki Katayama said she and U.S. Treasury Secretary Scott Bessent shared concerns over what she called the yen's recent "one-sided depreciation". "Markets will probably price in a scenario where Takaichi's coalition will gain more seats in the powerful lower house, and therefore that will enhance her ability to further loosen fiscal policy and potentially monetary policy," said Carol Kong, a currency strategist at Commonwealth Bank of Australia.

"So that's the main reason why the yen is selling off right now, on the back of those speculations."

Elsewhere, the Australian dollar was flat at $0.6710, while the New Zealand dollar rose 0.05% to $0.5775.

A private survey showed on Tuesday that Australia's consumer sentiment slipped in January as households wrestled with renewed rate jitters and an uncertain economic outlook.

Separately, a private think tank said the same day that New Zealand's business confidence in the fourth quarter improved and is now at its highest level since March 2014.

(Reporting by Rae WeeEditing by Shri Navaratnam)