The value of the pound briefly reached its highest point against the dollar in almost four years following concerns in the market about a report that US President Donald Trump may accelerate the announcement of the new head of the US central bank.
The pound rose above $1.37, which is the strongest it has been since October 2021.
The dollar weakened after the Wall Street Journal reported that Trump was considering naming a replacement for Jerome Powell as head of the Federal Reserve by September or October.
The Federal Reserve is independent from the government and Powell chairs the committee that makes decisions on interest rates. These rates have remained unchanged this year, leading to several outbursts from Trump.
On Wednesday, Trump called Powell “terrible” and said he was considering “three or four people” to replace him. Powell’s term is set to end in May 2026.
There are concerns that Trump may appoint someone who is more aligned with his demands.
Earlier this week, Powell told US lawmakers that the Fed would wait and see how the American economy responds if Trump’s proposed retaliatory tariffs against various countries go into effect next month, after being postponed until July 9th.
The Fed is worried that these tariffs, which are paid by businesses importing goods, could lead to inflation.
The US economy shrank in the first quarter of this year – the first decline in three years – due to a decrease in government spending and an increase in imports as companies rushed to bring products into the country before the tariffs were implemented.
JP Morgan, a major investment bank, has lowered the likelihood of a recession in the US this year, but at 40%, the possibility of a slowdown remains relatively high.
Kaspar Hense, a senior portfolio manager at RBC BlueBay Asset Management, stated that traders are betting on the dollar falling “in this environment, where there is a weakening of institutions.”
Meanwhile, Kit Juckes, chief FX strategist at Societe Generale, believes that “the market is anticipating President Trump appointing someone who appears to be more sympathetic to his cause.”
Experts have stated that trust in the Fed’s independence is crucial for maintaining the financial market’s faith in controlling inflation.
If this trust is shaken, it could lead to higher borrowing costs for everyone as investors may demand higher interest rates for holding debt.
There is speculation that Kevin Warsh, a former Fed governor, may be considered for the role.
Earlier this month, Trump was asked about the possibility of Warsh becoming the Fed’s chair, to which he responded: “He’s highly respected.”
Reports suggest that US Treasury Secretary Scott Bessent could also be a candidate.
During a recent House of Representatives hearing, Bessent stated that he currently has “the best job” in Washington and is “happy to do what President Trump wants me to do.”
Powell himself was appointed by Trump. During Trump’s first term in office, Powell replaced former Fed chair Janet Yellen.
Trump had criticized Yellen for keeping interest rates too low, stating: “I think she should be ashamed of herself.”
Yellen went on to become the US Treasury Secretary under President Joe Biden and stated that she did not believe Trump had a solid understanding of macroeconomic policy.