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Dollar extends losses as the battle for Fed independence rages

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1 September 2025

Written by
Enrique Díaz-Álvarez

Chief Economist

President Trump’s attempt to remove Federal Reserve Governor Lisa Cook is the most direct attack on the Fed’s independence since at least the 70s.

T
he dollar fell against most of its major peers last week, although the moves were relatively contained versus both the euro and the pound, and they left the greenback near the middle of the tight range that it has held all summer long. Hints in economic data that the feared slowdown may have been exaggerated after all surely helped. All in all, a quiet week in currency markets lacking in any clear trend moves, and where currencies only moved significantly on idiosyncratic national factors.

This trading week is shortened in the US by the Labour Day holiday. However, an unusually rich trove of macroeconomic data will be released. The most important will be the August labour market report out of the US on Friday. Strategists have revised down their expectations after July’s very weak report, but these are still consistent with modest job creation and only a small tick in unemployment. The replacement of the head of the organisation that compiles the report (the Bureau of Labor Statistics) by a committed Trump loyalist adds another dimension to the uncertainty. The Eurozone August flash inflation report on Tuesday will be the other focus for traders this week.

USD

While last week’s data generally surprised to the upside and painted a picture of a resilient economy, all bets are off before the critical employment report this Friday. A weakening labour market is the only rationale behind the Federal Reserve’s dovish turn and telegraphing of a September cut, and should data show resilience, such a move may read like the central bank is caving in to relentless pressure from Trump to cut rates.

Meanwhile, Lisa Cook’s attempted firing by Trump is likely to be a long legal process. While the short term impact is limited, the message being sent to other Fed governors is unmistakable. Long term rates are the key for Trump, as they drive mortgage rates and hence the housing markets, and these remain stubbornly high even as expectations for rate cuts grow.

GBP

The week was very quiet in terms of notable macroeconomic releases or monetary policy news, and sterling reflected that in torpid summer trading. There was more interesting market action in the gilt market, where long-dated rates continue to rise relentlessly. This is of course a general trend in sovereign debt markets, but British yields remain the highest in the G10. Labour’s inability to control spending amid persistent unpleasant surprises in the inflation numbers certainly do not help.

Markets are currently pricing in less than a 50% chance of even a single rate cut this year from the Bank of England, but the steady rise in medium and long term rates threaten to render policy moves less effective regardless. The focus in the UK this week will likely be on Friday’s retail sales figures for July, which are expected to show that consumer spending stalled at the start of the third quarter of the year.

EUR

The slow-moving global sell off in long term sovereign bonds is also affecting the Eurozone, although the effect there is very country-dependent. Investors are focused on France, which combines a dire fiscal picture with political instability. The French PM Bayrou will face a confidence vote next Monday as efforts to cut public spending have so far proved fruitless. 30-year rates in Germany also hit 15-year highs last week.

While the euro continues to benefit from worries about institutional degradation in the US, it is being held back by continued sluggish growth and the low short-term rates that go with it. This week’s key release is the flash inflation report for August, which should show continued convergence towards the ECB targets – a rarity among major economic areas.

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