The treasury yield curve steepened after President Donald Trump moved to oust US Federal Reserve (US Fed) Governor Lisa Cook from her post, denting sentiment toward the world’s reserve currency.
Two-year yields fell after Trump sought to remove Cook following allegations that she falsified documents on mortgage applications, on speculation the US Fed will cut interest rates as soon as next month. The yield on the 30-year climbed on concern looser monetary policy would risk fueling inflation. The Bloomberg Dollar Spot Index slipped.
“Cook’s removal is dollar negative as it would create another opening for President Trump to appoint a new Governor who may be more inclined to support interest-rate cuts,” said Carol Kong, a strategist at Commonwealth Bank of Australia in Sydney. “It further challenges the independence of the FOMC that underpins the safe haven status of the dollar, which can in turn lead to more dollar selling.”
Cook said she will not resign and disputed Trump’s authority to fire her, according to the Washington Post.
The latest Cook headlines add to the increasingly negative sentiment toward US assets as Trump’s trade policies and the ballooning deficit weigh on sentiment. Traders have been seeking out alternative havens to the dollar and Treasuries all year, and any perception of an erosion in the Fed’s independence may speed up that process.
“Trump’s removal of US Fed Governor Cook reminds that the US administration remains unconventional and unpredictable, and market concerns that the Fed board could become stacked with doves could boost term premia and long end break-even inflation rates,” says Andrew Ticehurst, senior rates strategist at Nomura Australia Ltd. “Steepeners appear to be popular trades, but I think that is understandable in this environment.”
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This all comes on top of worries about the US budget deficit after the House last month passed a US$3.4 trillion ($4.37 trillion) fiscal package that cuts taxes and curtails spending on safety-net program. Traders will be watching to see how this week’s Treasury auction, which include five and seven year tenors, are received by market participants given the latest developments.
The ratings could also come under pressure if political developments weigh on the strength of American institutions and the effectiveness of long-term policymaking or independence of the Federal Reserve.
The yen gained versus the dollar, though erased most of an earlier advance. Treasury two-year yields dipped two basis points to 3.71%, while those on 30-year bonds rose about four basis points to 4.93%.
“I see this as an extension of Trump’s intervention with the US Fed and a warning,” said Anna Wu, an investment strategist at Van Eck Associates. “Markets typically take such headlines as a threat to Fed independence. The removal of Cook gives Trump’s administration more space to appoint governors inclined to his playbook.”
