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The DXY Index depreciated by 0.6% to 97.85 overnight. US Treasury Secretary Scott Bessent urged a “comprehensive institutional review” of the Federal Reserve, casting doubt on the Fed’s credibility and intensifying market expectations for interest rate cuts. The US Treasury 30Y yield fell for a fourth session by 4.4 bps to 4.944% while gold prices rose 1.4% – its largest jump in six weeks – on haven demand. Viewed against his earlier push for the Treasury Department to play a greater role in banking regulation, Bessent is seen aligning Fed policy to US President Donald Trump’s fiscal and tariff agenda to advance the MAGA platform. If so, markets will find it more difficult to shake off concerns over the Fed’s independence, given what appears to be a unified strategy to bring monetary and financial governance under stronger executive oversight.
However, pushing for another steep decline in the DXY faces headwinds from Japan’s post-election uncertainty and anxiety over US-EU trade negotiations.
The JPY’s post-election rebound of 1% on Monday was seen as profit-taking on a widely anticipated outcome – the Ishiba government’s loss of its Upper House majority, which had already been priced in. While Prime Minister Shigeru Ishiba’s pledge to remain in office offered temporary reassurance about stability ahead of critical trade talks with the US, it does not ease worries about internal pressure within the Liberal Democratic Party to eventually replace a leader who has lost the majority in both houses of parliament. While the 10Y JGB yield has backed down from 1.60%, the market remains wary of more fiscal measures to address the opposition-led public discontent over inflation.
The EUR’s 0.6% appreciation to almost 1.17 was largely driven by broad USD weakness, triggered by Bessent’s call for a Fed review. However, the Trump administration has also been vigilant against a further rapid decline in the USD, which would undermine credibility and investor confidence in US financial markets. Some European Central Bank officials have also warned that further euro strength beyond 1.20 could suppress inflation below the 2% target and pressure exports. US-EU trade talks are at a critical juncture ahead of the August 1 tariff deadline. While both sides have emphasized the preference for a diplomatic resolution, the high stakes and aggressive posturing also mean that failure to find common ground could trigger a real tariff war, which would elevate economic risks and market disruptions.
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