Whilst economic policy uncertainty, as previously discussed by On Global Markets, has notable macroeconomic downsides, it can, at least, provide useful event studies for empirically minded economists. This week saw just such an episode.
On Wednesday morning, reports emerged that, at a meeting with Congressional representatives at the White House the day before, President Trump had discussed firing Fed chairman Jerome Powell.
In a meeting with lawmakers on Tuesday, Trump polled them about whether he should fire Powell, a senior White House official told CNN. And he told them that he was going to fire him – maybe Wednesday – pointing to the $2.5 billion renovation plan at the Federal Reserve building, which he claimed he was not happy about, according to a source briefed on the president’s remarks in the meeting.
Later that day, the President clarified that he was ‘highly unlikely’ he would fire the head of the central bank.
If any proof was needed that firing the head of the Fed because interest rates are not as low as the White House would like would be dollar negative, this is as good as any.
Dollar weakness has been a major theme of global markets in 2025. As the New York Times recently noted, the 10.7% fall in the value of the greenback against a broad basket of other advanced economy currencies between January and June was the currency’s worst first half of a year since 1973.
This was, to say the least, unexpected. In the various year-ahead outlooks for 2025 published by investment banks, asset managers, and sell-side research houses, a bullish view on the dollar was near consensus. The so-called Trump trade envisaged deregulation and tax cuts driving equity prices higher, while an expanding deficit pushed up the yield on Treasury bonds. That higher yield would, it was assumed, attract buyers for the dollar and push its value upwards.
During the brief, but still alarming, period of market turbulence after the Liberation Tariffs were put in place in April this year, the yield on US government debt rose sharply whilst the dollar fell quickly. That historically unusual combination of rising yields and a falling dollar spooked many investors. It even lead to many respected analysts, not the usual suspects who are always keen to give an alarmist quote, to openly ask whether the dollar was beginning to lose its safe haven status.
In the latest FTxBooth survey, published at the end of June, the Experts were asked “how concerned are you about the ongoing safe-haven role of U.S. dollar denominated assets over the next 5-10 years?”. Just 9% of respondents were not concerned at all, while 32% considered themselves to be very concerned. A majority were concerned.
The President has been offering an increasingly vocal running commentary on the Fed for months. Rarely a week goes by without him calling for lower rates or questioning their competence. While that is hardly an ideal situation for global markets, it is one that they have at least become acclimatised to. Although if those words actually crystallised into action, with President Trump moving to fire Chairman Powell and replace him, there would – as Wednesday’s price action demonstrated – be immediate consequences.
The notion of fiscal dominance taking hold – with the Fed being bullied into setting monetary policy in order to ease Federal budgetary concerns and debt management issues at the forefront of its mind rather with price stability as its main aim – would be one route to the dollar’s appeal as a safe haven being lost.
Another obvious cause for concern is a lack of fiscal discipline in Washington. The two running together is very much a nightmare scenario, as Robert Barbera told the FT.
“Breathtaking fiscal policy excess is all but guaranteed, and that invites, though hardly guarantees, a change of heart about dollar assets,” said Robert Barbera at Johns Hopkins University. “Marry that emerging reality to a de facto White House takeover of the Fed — through a Powell firing or the championing of a hack as a Powell replacement? That would move me from somewhat concerned to very, very concerned.”
The question the panel was asked, rightly, referred to a five-to-ten period. Safe haven status is not something that can be lost overnight. But the combination of a large and growing government deficit, frequent attacks on the independence of the Federal Reserve, and an erratic tariff policy all at least raise serious questions over that status. So too does the mood music from administration-aligned economists regularly questioning whether providing global reserve assets is in the best interests of the United States.
The best case for the dollar retaining that status now may be a negative one; the lack of an obvious alternative. Eurozone policymakers are happy to talk up the potential global role of the Euro, but are also quick to appear uncomfortable when the single currency strengthens. More generally, the stock of Euro denominated safe assets appears too small to substitute for the dollar. That, though, will not be the case forever.
