(Bloomberg) -- Treasuries slipped and the dollar rose as markets grappled with the fallout from US President Donald Trump's latest attacks on Federal Reserve Chair Jerome Powell.
Yields on US government bonds inched higher across the curve, with those on 10-year Treasuries up two basis points to 4.48%. Bloomberg's gauge of the dollar added 0.4%.
US assets whipsawed Wednesday by reports Trump was preparing to fire Powell, with shorter tenors rallying on the prospect that could lead to faster interest-rate cuts, and then by headlines saying he's not planning to ax him. While Trump has repeatedly criticized Powell this year, the latest escalation spooked investors over the prospect of political interference at the central bank.
"Any central bank's biggest asset is its credibility, so if that were to go, through a firing, the market will take it very badly," Kokou Agbo-Bloua, Societe Generale SA's global head of economics & cross-asset research, told Bloomberg TV. "I think we would have a pretty significant amount of volatility," he said, adding that speculation about a replacement would simply further increase swings in US asset prices and weaken the dollar.
Trump said it was "highly unlikely" that the Fed chair would be sacked, but he kept up the pressure by reiterating his view that the central bank is keeping interest rates too high and declining to "rule out anything."
Concern will continue to hang over markets and put pressure on the dollar and Treasuries until the situation resolved, said George Saravelos, global head of FX research at Deutsche Bank AG. "This underlying story, so long as it lingers, it will act as a big headwind both to the dollar and to fixed income, until it gets resolved one way or another," he told Bloomberg TV.
Activity in the options linked to the Secured Overnight Financing Rate, which closely tracks Fed policy expectations, showed traders looking to hedge potential for deeper and faster rate cuts versus market pricing. The volumes over Wednesday's session in SOFR futures topped six million for the first time in about six weeks as traders looked to re-position around the news.
However, chief economist at Apollo Management Torsten Slok believes the market is overpricing the chances of further reductions this year, as the Fed will have to assess the inflationary impact of tariffs and deportations.
"The market is way way too eager to price in cuts," he told Bloomberg TV. Slok sees one rate cut by the end of the 2025, while the market is pricing in a 70% chance of two.
For more clues, traders will next be turning their focus to US retail sales data and initial jobless claims figures coming later on Thursday.
More stories like this are available on bloomberg.com
