New York — The risk that pressure from US President Donald Trump could shift the Federal Reserve to an overly dovish stance is the main near-term concern for the US dollar, said a senior executive at US asset manager PGIM Fixed Income.
Trump has relentlessly criticised Fed chair Jerome Powell and the US central bank’s board of governors for not lowering rates sufficiently. This has investors concerned that political pressure could influence monetary policy.
The dollar is already down about 9.5% this year against a basket of major currencies. Trump’s attempt to remove Fed governor Lisa Cook, and the appointment of his economic adviser Stephen Miran to the Fed’s seven-member board, have recently exacerbated worries that the Fed could ease too aggressively and let inflation off the leash.
“We do worry quite a bit about an abruptly dovish shift in the Fed’s reaction function going into next year,” said Daleep Singh, vice-chair and chief global economist at PGIM Fixed Income, a New Jersey-based firm with nearly $900bn in assets under management.
He was speaking at a dollar conference at the Federal Reserve Bank of New York. While the US central bank, which last week cut rates for the first time since December, is expected to continue to lower borrowing costs gradually over the coming months, the picture could change after Powell’s mandate as Fed chair ends in May next year, said Singh, who previously served as deputy national security adviser for international economics in the Joe Biden administration.
“There’s a very decent chance that the FOMC looks and acts quite differently,” he said.
Easy monetary policy, along with loose fiscal policy and upward pressures on inflation, would be negative for the dollar, he said, particularly given that central banks in other major economies are at different stages of their monetary policy cycles and are unlikely to mimic the Fed’s dovish shift.
“On a cyclical basis, I think the risks to the dollar are skewed to the downside,” he added.
Reuters
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