Dollar hits 3-year low on report Donald Trump could pick next Federal Reserve chair early

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The dollar weakened to a three-year low on Thursday after a report that Donald Trump was considering nominating the next Federal Reserve chair early, due to the US president’s frustration at the slow pace of interest rate cuts.

The US currency fell as much as 0.7 per cent against a basket of its trading partners including the pound and the euro, hitting a level last reached in early 2022. It later rebounded to trade 0.5 per cent lower.

The dollar has slid this year on concerns over the US economy from Trump’s trade war and broader economic policies. The latest move came after a Wall Street Journal report that the US president was considering announcing his pick to succeed Jay Powell earlier than expected. Powell’s term expires in May 2026.

“A candidate who is perceived as being more open to lowering rates in line with President Trump’s demands would reinforce the US dollar’s current weakening trend,” said MUFG senior currency analyst Lee Hardman.

The euro gained as much as 0.7 per cent against the dollar to $1.174 — its strongest level since September 2021 — after Nato allies in Europe pledged on Wednesday to raise defence spending to 5 per cent of GDP by 2035. The pound rose as much as 0.7 per cent to $1.376.

Richard Yetsenga, chief economist and head of research at ANZ, said “the possibility of an early Fed chair announcement is one of the factors pushing the dollar lower today”.

“On the European side the confirmation of higher fiscal spending, in this case around defence, is also giving the euro a boost,” he added.

The dollar has weakened more than 10 per cent this year as the anticipated hit from the trade war and growing warnings about the sustainability of the US debt pile mix with concerns about Fed independence.

“The broader backdrop remains one where the perception is the US economy is slowing more quickly than the rest of the world and that’s been contributing to investor allocation out of the US,” said Yetsenga.

Kelvin Lau, senior economist for greater China and Asia at Standard Chartered, said the possibility of an early nomination for the next Fed chair “has led to the belief that the Fed could shift to an earlier” interest rate cut, weighing on the dollar.

Powell has pushed back against Trump’s call for an immediate reduction in interest rates.

“You could just imagine a scenario where a Fed nominee starts criticising the Fed,” said Mitul Kotecha, head of emerging markets macro strategy at Barclays. “It’s become a shadow Fed environment, and that is one of the biggest fears on the impact on Fed credibility.”

US Treasuries were stable, with rate-sensitive two-year yields down 0.01 percentage points to 3.77 per cent.

European stocks posted modest gains, with Europe’s Stoxx 600 index up 0.2 per cent, while futures tracking the US blue-chip S&P 500 were up 0.3 per cent.