Dollar and Stocks Sink Further in the Shadow of Powell-Trump Conflict

U.S. stocks, long-term Treasury bonds, and the dollar have plunged as traders weighed President Donald Trump’s threats to attempt to remove Federal Reserve Chairman Jerome Powell.

The S&P 500 fell more than one percent, and the dollar index weakened to its lowest level in 15 months when Wall Street reopened after a long holiday weekend. Government bonds fell, pushing the 10-year yield close to 4.4 percent. As investors turned away from U.S. securities, other safe-haven assets rose. Gold surged to another record, above $3,400 per ounce, while the Swiss franc led gains among other G10 currencies, Bloomberg reports.

National Economic Council Director Kevin Hassett said on Friday that Trump is studying whether he can fire Powell. The comments raised new questions about whether the Fed can maintain its long-standing independence with a president who increasingly expresses dissatisfaction in sharp terms because the central bank has not moved more quickly to lower interest rates.

Marvin Loh, senior global macro strategist at State Street, discusses market concerns over President Donald Trump’s threat to fire Federal Reserve Chairman Jerome Powell.

– If Powell were to be fired, the initial reaction would be a massive injection of volatility into financial markets and the most dramatic rush out of U.S. assets imaginable, said Michael Brown, senior research strategist at Pepperstone, to Bloomberg. “Not only is the independence of the Fed clearly threatened, but the possibility of dedollarization and distancing from U.S. hegemony is becoming increasingly real.”

– The politicization of the Fed risks politicizing U.S. monetary policy in a way that markets would find deeply unsettling, said Christopher Wong, currency strategist at Oversea-Chinese Banking Corp. – If the credibility of the Fed is called into question, it could seriously undermine confidence in the dollar, he added.

Investors Turn Away from the U.S.

Bloomberg’s dollar spot index slid 0.8 percent on Monday. Every G10 currency gained against the dollar. The surge in the yen affected stock indices in Japan, pushing the Nikkei 225 down by 1.3 percent.

The yen, euro, and Swiss franc strengthened. WTI crude oil fell by more than two percent to below $64 per barrel. European stock markets were mostly closed due to a public holiday.

Chicago Fed President Austan Goolsbee warned against attempts to limit the independence of the central bank. – Among economists, there is virtually unanimous opinion that monetary independence from political interference – that the Fed or any central bank can do the job it needs to do – is really important, Goolsbee said on CBS’s Face the Nation on Sunday.

Lawyers say the president cannot easily remove the Fed chairman, and Powell has previously stated that he would not resign if Trump asked him to.

As a sign that investors are shifting investments away from the U.S., Deutsche Bank AG said that Chinese clients have reduced their holdings of U.S. government bonds in favor of European debt. European high-quality bonds, Japanese government bonds, and gold are likely to be potential choices for investors as alternatives to government bonds, said Lillian Tao, head of China macro and global emerging markets sales at the bank.

Tesla Inc. slid four percent in pre-market trading. Wedbush Securities analyst Dan Ives said the company is facing a “code red” moment as it prepares to report earnings on Tuesday, and that Elon Musk should step back from his role in the government efficiency department to focus on Tesla.