The dollar staged a shaky recovery on Wednesday, with gains capped by renewed investor worries about the Federal Reserve's independence following U.S. President Donald Trump's latest attempt to extend his power over the central bank.

Trump had on Monday said he would fire Fed Governor Lisa Cook over alleged improprieties in obtaining mortgage loans, though Cook's lawyer later said she would file a lawsuit to prevent her ouster, kicking off what could be a protracted legal fight.

The dollar initially weakened on the developments though later regained some ground on Wednesday, rising 0.33% against the yen to 147.93 and leaving the euro trading 0.24% lower at $1.1614.

Sterling fell 0.23% to $1.3448, while the dollar index rose 0.2% to 98.47.

Still, gains in the greenback were limited as Trump's push to gain more influence over U.S. institutions and the path of monetary policy further eroded investors' trust in the dollar's dominance.

"It's the latest salvo in the Fed wars and shows how increasingly politicised the central bank is becoming," said Neil Wilson, UK investor strategist at Saxo, referring to Trump's attempt to fire Cook.

"It's going to be virtually impossible for the next chair to do anything other than Trump's bidding. This should be negative for the dollar. The question for markets right now is about the September meeting but be in no doubt that we are witnessing a regime shift like we have not seen in decades."

Also weighing on the dollar were expectations of faster and deeper U.S. rate cuts, particularly if Cook - should she be removed from her position - gets replaced by someone dovish.

Trump has repeatedly called for the Fed to lower interest rates and has threatened to fire Fed Chair Jerome Powell, although he recently backed down from that.

Cook's departure would allow Trump to pick a majority of the Fed's seven-member board, including two incumbents and the pending nomination of White House economist Stephen Miran.

"Trump has essentially usurped the Fed's forward guidance function for the time being and telling markets lower rates are coming, which is being manifest in a steeper yield curve," said Jamie Cox, managing partner for Harris Financial Group.

The two-year U.S. Treasury yield , which typically reflects near-term rate expectations, bottomed at 3.6540% on Wednesday, its lowest since May 1, as traders ramped up bets of imminent Fed cuts.

Yields on the longer end of the curve have meanwhile risen on concerns that forced easing of monetary conditions in the near term will lead to a resurgence in inflation.

The 30-year yield was last a touch higher at 4.9223%.

In other currencies, the Australian dollar was last down 0.16% at $0.6484, while the New Zealand dollar eased 0.27% to $0.5845.

The Aussie got a brief lift earlier in the session after domestic data showed consumer prices jumped far more than forecast in July, while core inflation also rose in a blow to hopes of a rate cut from the Reserve Bank of Australia as soon as next month.

Source: Reuters