Dollar Plummets to Three-Year Low as Powell Successor Speculation Ramps Up
The US dollar is under meaningful pressure, hitting a three-year low amid growing speculation about a potential successor to Federal Reserve Chair Jerome Powell and shifting expectations for monetary policy. A confluence of factors, including disappointing economic data and upcoming Treasury auctions, are exacerbating the downward trend.
Dollar Weakness Intensifies
The dollar has been “pummeled” today, according to market analysis, extending weakness seen yesterday. It is currently down against all G10 currencies except the Russian ruble and Turkish lira. The immediate catalyst for today’s sell-off was reports suggesting an proclamation regarding Powell’s successor could come within months.
“The attempt to influence the Fed so directly does not sit well with investors,” one analyst noted,highlighting the sensitivity surrounding perceived political interference in monetary policy.
In the Fed funds futures market, the probability of a rate cut has crept up to around a 1-in-4 chance. More significantly, almost 63 basis points of easing are now priced in before the end of the year – the most since early May. This, combined with typical month- and quarter-end flows and the approaching end of a pause in “so-called reciprocal tariffs” on July 9, is weighing heavily on the dollar.
Did you know?-The Federal Reserve has a dual mandate: to maintain price stability and maximize employment. Speculation about a new chair frequently enough revolves around which goal a potential candidate prioritizes.
Global Markets Mixed
While the dollar falters, equity markets present a more mixed picture. Most global equity markets are higher, but China, Hong Kong, Australia, and South Korea are notable exceptions in the Asia Pacific region. Europe’s Stoxx 600 is up approximately 0.25% near midday, recovering from a nearly 0.75% decline yesterday. US index futures are currently 0.2%-0.4% higher.
Benchmark 10-year yields are generally softer, although the Japanese government bond yield is bucking the trend with a two-basis-point increase. European rates are mostly 1-2 basis points lower, and the German 10-year yield is off a basis point to 4.28%.The expected year-end effective average for Fed funds is now 3.70%, falling for the fifth consecutive session and down 11 basis points from the end of last week. The US 10-year treasury yield is also lower for the fifth straight session, down about 10 basis points on the week.
Reader question:-How do you think a change in Fed leadership would impact your investment strategy? What sectors do you see benefiting or suffering most?
Commodity Performance
Gold prices are firmer but remain within Tuesday’s trading range of approximately $3295-$3370. August West Texas Intermediate (WTI) crude oil is also contained within Tuesday’s range of $64.0-$67.85, mirroring yesterday’s price action ($64.50-$66.00).
Currency Specifics
- Euro: The euro reached a marginal new three-year high of $1.1665 yesterday and has continued it’s ascent, breaking through $1.17 to reach almost $1.1745 in early European trading.The US two-year premium over Germany has narrowed to 193 basis points, the lowest level since the end of April, and has been shrinking for five consecutive sessions.The US 10-year premium has also decreased to around 173 basis points, also a level not seen since the end of april.
- Yen: The yen was the weakest among the G10 currencies yesterday, but the weaker dollar has provided some relief today, pushing the exchange rate to JPY143.75, an eight-day low.
- Chinese Yuan: The dollar fell to a new low against the Chinese yuan today near CNH7.1525. The People’s Bank of China (PBOC) set the dollar’s reference rate lower today (CNY7.1620 vs. CNY7.1668 yesterday) and the Hong Kong Monetary Authority intervened to sell dollars and buy Hong Kong dollars to defend the exchange rate band.
- Sterling: Sterling has risen to a new three-year high, extending gains to $1.3765 today. A close above last week’s high (~$1.3620) tomorrow would be a bullish technical signal.
- Canadian Dollar: The Canadian dollar is lagging behind other G10 currencies in the falling dollar environment. Canada is set to report April GDP data tomorrow.
- Australian Dollar: The Australian dollar is on a three-day rally, testing resistance near $0.6550.
- mexican Peso: The peso is experiencing demand on dollar spikes, edging toward MXN18.8665 today. Mexico’s May trade balance data and the outcome of its central bank meeting are due later today, with expectations for another 50-basis-point rate cut to 8%.
US Economic Data and Treasury Auctions
The US economic calendar is busy today, with the Treasury set to auction $44 billion of seven-year notes following yesterday’s poor reception to a five-year note auction. may’s goods trade report will also be closely watched. The postponement of reciprocal tariffs appears to have spurred a surge in US imports, mirroring strong export data from several Asian countries. May durable goods orders where likely boosted by Boeing orders, but excluding aircraft and defense, orders are expected to have fallen for the second consecutive month.
After two days of testimony from Chair Powell,Fed funds futures indicate a slightly more than 15% chance of a July rate cut,largely unchanged since the US jobs report. September is now considered a more realistic timeframe for potential easing.
“`html
What a New Fed Chair Could Mean for the Dollar
The ongoing speculation surrounding the potential successor to Jerome Powell is more than just market chatter; it is a complex issue with significant implications for the US dollar and the global economy. The choice of the next Federal Reserve Chair carries immense weight, influencing everything from inflation targets to employment rates. Given the current economic climate – including high inflation and concerns around a potential recession – the market is particularly sensitive to any signals regarding future monetary policy direction.
The next Fed Chair will define the dollar’s trajectory. A shift toward a more dovish stance could push the dollar lower, as investors anticipate more interest rate cuts. Conversely, a hawkish appointment might strengthen the dollar by signaling a commitment to tighter monetary policy to combat inflation.
This is particularly critical because, as reported, President Trump is considering announcing his choice for the next Fed Chair early
