Market News

By Ankur Banerjee

SINGAPORE (Reuters) -The dollar wobbled on Friday, poised for a 2% drop in August against major currencies on rising odds of the Federal Reserve cutting interest rates next month while worries about the threats to the U.S. central bank's independence linger.

President Donald Trump's campaign to exert more influence over monetary policy, including attempts to fire Lisa Cook, one of the Fed's governors, has weighed on the dollar. Cook filed a lawsuit claiming Trump has no power to remove her from office.

The legal battle is the latest chapter in Trump's attempts to reshape the central bank after repeatedly criticizing the Fed and its Chair Jerome Powell for not cutting interest rates.

Currency markets started Friday tentatively, with the euro little changed at $1.1675, on course for a 2% gain in August. Sterling last bought $1.3509 and the Japanese yen fetched 146.97 per dollar.

The Australian dollar was steady at $0.6533, set for a 1.6% gain in the month.

The dollar index, which measures the U.S. currency against six major peers, was at 97.917, on course for a 2% decline in the month. The index is down nearly 10% this year as erratic U.S. trade policies drove investors towards alternative assets.

"While President Trump may be able to lower the Fed Funds rate by influencing the make up of the interest rate setting committee, longer term interest rates may not respond in kind," said Carol Kong, currency strategist at Commonwealth Bank of Australia.  

"If markets perceive the FOMC’s independence as compromised, inflation expectations could become unanchored, driving long term interest rates higher."

Trump's push to place hand-picked, dovish-leaning candidates on the central bank's decision-making committee has pressured short-term yields lower, while the longer term yields have risen.

A politically influenced Fed that keeps interest rates lower than they otherwise might could result in higher inflation and reduce foreign demand for the debt due to credibility fears, while a worsening fiscal outlook is also expected to weigh on longer-dated bonds.

The yield curve between two-year and 10-year notes was last at 57 basis points, after hitting their steepest level since April earlier in the week.

Still, market reaction to the battle between Trump and the Fed's Cook has been relatively muted with slight dollar selling and curve steepening.

"The market is looking through the amplified theatre and noise with regard to the robust opinions circulating regarding the independence of the US Fed," said George Boubouras, head of research at K2 Asset Management.

"The market is not complacent about these developments, it is simply being pragmatic."

RATE CUT WAGERS

Federal Reserve Governor Christopher Waller said on Thursday he wants to start cutting rates next month and "fully expects" more rate cuts to follow to bring the Fed's policy rate closer to a neutral setting.

Markets are currently pricing in an 86% chance of a rate cut in September, up from 63% a month earlier, CME FedWatch showed. Traders are wagering on over 100 basis points of easing by June next year.

Data on Thursday showed the U.S. economy grew faster than initially thought in the second quarter, but tariffs on imports continued to cloud the picture.

Investors will parse through the PCE price index report, the Fed's preferred inflation measure, later on Friday. On a year-over-year basis, headline PCE inflation is estimated at 2.6%, after rising at the same rate in June.

While a reading of 3% or higher will raise eyebrows after the Fed’s dovish pivot, the key data remains next Friday’s labour market report ahead of the September FOMC meeting, said Tony Sycamore, market analyst at IG.

(Reporting by Ankur Banerjee in SingaporeEditing by Shri Navaratnam)