The Dollar's Rollercoaster Ride: Trump's Trial Balloon and Market Reactions
The dollar index (DXY00) experienced a volatile day on Wednesday, rallying to a 3-week high but then backing off and ending the day down -0.21%. The dollar sold off after President Trump appeared to float another trial balloon regarding the potential firing of Fed Chair Powell. Mr. Trump suggested to House Republicans he met with on Tuesday that he wanted to fire Mr. Powell, but he then denied that intention Wednesday after the markets reacted negatively to emerging reports of what Mr. Trump had told those lawmakers.
Market Reactions to President Trump's Trial Balloon
The dollar fell on the Powell news, as a political takeover of the Fed could spook foreign investors and encourage a run on dollar-denominated stocks and bonds. The dollar was also undercut by the soft PPI report and Wednesday's -3 bp decline in the 10-year T-note yield. Wednesday's June PPI report was favorable, as both the month-over-month and year-over-year figures were better than expected, suggesting that tariff inflation has not yet hit the producer level.
Inflation Optimism and Tariff Impact
The PPI report sparked some inflation optimism after Tuesday's mixed CPI report. Specifically, the June final-demand PPI was unchanged m/m and +2.3% y/y, which was weaker than expectations of +0.2% m/m and +2.5% y/y. The June core PPI report of unchanged m/m and +2.6% y/y was weaker than expectations of +0.2% m/m and +2.6% y/y. The year-over-year figures of +2.3% (nominal) and +2.6% y/y (core) were down from the revised May figures of +2.7% and +3.2%, respectively.
US Industrial Production Report
Wednesday's June US industrial production report of +0.3% m/m was slightly stronger than market expectations of +0.1%, and May was revised higher to unchanged from -0.2%. The June US manufacturing production report of +0.1% m/m was slightly stronger than expectations of unchanged.
New York Fed Services Business Activity Index
The July New York Fed services business activity index rose to -9.3 from -13.2 in June. The Fed's Beige Book survey of the US regional economies showed that US economic activity "increased slightly between late May and early July." The report said, "That represented an improvement over the previous report, in which half of the districts reported at least slight declines in activity." The report added, "Uncertainty remained elevated, contributing to the ongoing caution by businesses."
Inflation Pressures
Regarding inflation, the Beige Book stated that all districts reported price increases, with businesses experiencing "modest to pronounced input cost pressures related to tariffs." The report added, "Many firms passed on at least a portion of the cost increases to consumers through price hikes or surcharges, although some held off raising prices because of customers' growing price sensitivity, resulting in compressed profit margins."
Fed Policy Expectations
Expectations for Fed policy ended the day little changed after some movement on the Powell news. Federal funds futures prices are discounting the chances for a -25 bp rate cut at 3% at the July 29-30 FOMC meeting and 58% at the following meeting on Sep 16-17.
Currency Markets
EUR/USD (^EURUSD) rose +0.21% due to weakness in the dollar. The euro also received support from the May Eurozone trade surplus report, which showed a surplus of 16.2 billion euros. This was wider than market expectations of 14.0 billion euros and up from April's revised 15.1 billion euros.
USD/JPY
USD/JPY (^USDJPY) fell by -0.60% as the Powell's reports led to speculation that some Japanese investors might repatriate capital. The yen also had support from interest rate differentials, as the 10-year JGB yield on Wednesday rose +0.4 bp, while the US 10-year T-note yield fell -3.0 bp.
Gold and Silver Prices
August gold (GCQ25) on Wednesday closed up +22.40 (+0.67%), and September silver (SIU25) closed up +0.009 (+0.02%). Bullish factors for gold included the lower dollar and the -3 bp decline in the 10-year T-note yield. Gold also received support from safe-haven demand after President Trump's apparent trial balloon regarding the firing of Fed Chair Powell.
Conclusion
The dollar's rollercoaster ride on Wednesday was a reflection of market concerns about the potential for a political takeover of the Fed and its impact on inflation expectations. The Beige Book survey highlighted ongoing uncertainty and caution among businesses, which is likely to influence the Fed's policy decisions in the coming months. As markets continue to navigate these uncertain times, investors would do well to keep a close eye on developments related to the dollar, inflation, and Fed policy.