Trump Escalates Powell Feud, Inflation Concerns Mount

The US dollar and financial markets face mounting pressure as President Donald Trump escalates his campaign against Federal Reserve Chair Jerome Powell. The intensifying conflict has heightened investor concerns over inflation, monetary policy independence, and currency stability.

The Bloomberg Dollar Spot Index is down 7% in 2025, its worst start to a year since the index’s inception in 2005. Despite this, Credit Agricole’s chief currency strategist, Valentin Marinov—ranked as Bloomberg’s top forecaster for major currencies in 1Q25— anticipates a dollar rebound by mid-year. Marinov projects the yen will weaken to 148 per dollar from 141 and the euro will decline to US$1.08 from approximately US$1.15.

Marinov noted that export-driven economies, such as the eurozone and Japan, are particularly vulnerable during trade wars. “Export-oriented economies like the eurozone and Japan are likely to underperform the United States during a trade war, reducing the relative appeal of the euro and yen versus the dollar,” he explained. He also argued that fears of reserve diversification away from the dollar and broader de-dollarization trends are exaggerated.

Nevertheless, Marinov acknowledged that Trump's ongoing threats to dismiss Powell pose a downside risk to the dollar, potentially requiring revisions to his forecasts. The political pressure has raised serious concerns about the Federal Reserve’s independence and its capacity to manage inflation effectively.

Trump has called Powell a "big loser" and has publicly urged the Fed to implement immediate interest rate cuts, suggesting on social media that the US economy risks stagnation without them. White House economic advisor Kevin Hassett confirmed that Trump’s team is exploring legal avenues for Powell’s dismissal, though statutory protections allowing removal only “for cause” complicate such efforts.

Powell has warned that tariff-driven policies could lead to a harmful mix of stagnation and inflation, complicating the Fed’s dual mandate. While affirming that the central bank’s independence is legally protected, he acknowledged that future Supreme Court rulings could redefine the scope of protections for independent agencies.

Currency markets have responded sharply to the turmoil. The dollar index dropped 1.09%, while the euro gained 1.36%, and the British pound rose 0.79%, supported by thin trading volumes during the Easter holiday. The Mexican peso appreciated 0.08% in the latest session, recording weekly and monthly gains of 1.99% and 2.66%, respectively, as it benefited from the dollar’s slide.

Bond yields have also fluctuated amid the uncertainty. The 10-year U.S. Treasury yield rose 7.79 basis points to 4.40%, while the Mexican 10-year bond increased slightly by 0.68 basis points to 9.47%.

Equity markets reflected heightened caution, with the S&P 500 falling 3.35%, the Nasdaq dropping 3.63%, and the Dow Jones losing 3.26%. Trading volumes remained subdued due to global market closures for Easter. Analysts attributed the sell-off to growing doubts about the Fed’s independence and inflationary pressures from Trump’s tariff policies.
 

"This offensive has already inflicted damage to the perception of the Fed's independence, which could erode confidence in the dollar," analysts at Pimco warned.

Amid these developments, currency volatility in the US$7.5 trillion-a-day FX market has spiked, driven by erratic tariff announcements and speculation about Fed leadership changes. Marinov cautioned that inflationary risks from new tariffs persist and suggested that markets may have “moved too fast, too soon” in pricing in a weaker dollar.