The US dollar is slowly declining due to concerns about Trump’s attempt to fire Fed Governor Cook. This move raises questions about the Federal Reserve’s independence, which could lead to a bigger drop in the dollar soon. Fed Chair Powell has hinted that the central bank might cut rates again. This adds more pressure on the dollar, suggesting it could weaken further.

Europe Tariffs and Economic Impact

In other news, Trump is pushing for a 15-20% minimum tariff on EU goods, which has affected the EUR/USD exchange rate. UBS has raised alarms about potential inflation issues and a slowdown in growth due to concerns about the Fed’s independence. Market reports suggest a positive outlook for the euro and a downgrade for the yen. Private surveys show lower than expected oil inventories. Analysts predict that the Fed will cut rates two times before the year ends, which could impact gold and the stock market. Japan’s finance minister is worried about currency fluctuations. Former Fed Governor Brainard also noted risks of rising inflation and higher long-term rates due to Trump’s actions. We are witnessing a significant attack on the Federal Reserve’s independence, signaling a weaker US dollar ahead. The Dollar Index (DXY) has dropped below the important 100.50 support level for the first time since early 2025, showing that the market is adjusting its risk outlook for US assets.

Fed Policy and Market Reactions

The Fed is contributing to this situation with Chairman Powell indicating a shift toward easier monetary policy. Futures markets now see over an 85% chance of a rate cut in September, with major banks predicting two cuts by year-end. This shift reduces the dollar’s yield advantage compared to other major currencies. This situation is reminiscent of the 1970s when political pressure on the Fed led to high inflation and currency devaluation. There’s a fear that a politically influenced central bank won’t manage inflation well, which could result in higher borrowing costs and hinder growth. We need to closely monitor inflation data, particularly the upcoming CPI report, for signs of an increase. For FX traders, the consensus seems to be to go long on EUR/USD, with targets reaching 1.20 by the end of the fourth quarter. Still, caution is needed, as the proposed 15-20% tariffs on EU goods might create challenges for the euro even against a weakening dollar. This complicated situation makes trading euro pairs with other currencies like the yen a clearer strategy. The political turmoil is increasing market volatility, so we should adjust our positions accordingly. The CVIX, a key measure of currency volatility, has already risen by 15% this week, and options pricing indicates expectations for larger swings in the weeks to come. Buying straddles or strangles on major dollar pairs could be a way to navigate this uncertainty. Gold has reacted predictably, breaking above $2,450 per ounce as investors look for a safe haven amid political chaos and dollar depreciation. As long as the Fed appears to be politically influenced and on a path to cut rates, gold should remain a strong asset. We see it as a core holding for the current environment. Create your live VT Markets account and start trading now.

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