The dollar strengthened against the euro and the pound sterling on Wednesday (August 27), but investor concerns over the Fed's independence persisted, potentially limiting the US currency's gains.

The euro weakened about 0.4% to $1.1593 and the pound weakened 0.3% to $1.3441, giving back some of the gains sparked by Trump's announcement on Monday that he would fire Fed Chair Lisa Cook over alleged irregularities in obtaining mortgage loans.

Cook's lawyer later said he would file a lawsuit to prevent her dismissal, potentially triggering a protracted legal battle. Trump's unprecedented effort to remove a Fed Chair adds to the relentless pressure he has put on the central bank to lower interest rates since his return to the White House this year.

While the dollar appears to have eased immediate concerns over the Fed's independence, Trump's actions have contributed to a sharp steepening of the US Treasury yield curve. "Trump has essentially taken over the Fed's forward guidance function for the time being and is telling the market that lower interest rates are coming, which is manifesting in a steeper yield curve," said Jamie Cox, Managing Partner at Harris Financial Group.

The two-year U.S. Treasury yield, which typically reflects short-term interest rate expectations, hit a low of 3.6540% on Wednesday, its lowest level since May 1, as traders increased bets on an imminent Fed rate cut.

Yields on longer-dated yields, meanwhile, have risen amid concerns that premature easing of monetary conditions could lead to a spike in inflation.

The 30-year Treasury yield was last slightly higher at 4.9223%.

The U.S. dollar's resilience "could be a reflection that market participants are still waiting for stronger confirmation from the August NFP and inflation reports that the Fed will follow through on its plan to continue cutting rates next month," said Lee Hardman, Senior Currency Analyst at MUFG. Currency markets currently price an 87% chance of a 25 basis point rate cut in September, according to the CME FedWatch tool.

Meanwhile, political developments in France are likely to remain a focus for the euro as Prime Minister Francois Bayrou struggles to save his minority government. "While not discounting political risks in France in the short term, we also note European Central Bank President Christine Lagarde's optimism about the economic recovery and her ambition for the euro to play a greater international role," analysts at DBS said in a note.

French government bonds held steady on Wednesday, a day after the benchmark 10-year bond yield rose to a five-month high. European ratings agency Scope sees a French government collapse as the most likely outcome. Among other currencies, the US dollar strengthened about 0.2% against the Japanese yen and Swiss franc, while the New Zealand dollar was last down 0.4% at $0.5834. (alg)

Source: Reuters