Foreign investors are increasingly uneasy about U.S. monetary policy after President Donald Trump's public criticism of Federal Reserve Chair Jerome Powell, according to Yardeni Research.

Though Trump recently said it was "highly unlikely" he would fire Powell, Yardeni noted the president also added, "I don't rule out anything," leaving markets jittery.

"We don't believe President Trump will fire Powell," Yardeni wrote, "but, just in case, we examine the credibility crisis that could ensue if he does."

Officials in Tokyo and Beijing reportedly view Powell's ouster as more of a "when" than an "if," the note said.

With Japan and China holding over $1.8 trillion in U.S. Treasuries combined, Yardeni warned those countries would be "directly on the frontlines" if Trump were to remove Powell.

A confrontation over the Fed could spark a surge in U.S. bond yields and damage the dollar, said the firm.

"The worry for Asia is that the brawl over the most powerful central bank… could send U.S. yields skyward and the dollar sharply lower," Yardeni said.

In the worst-case scenario, the firm said Trump could try to fire Powell outright or appoint a "shadow" Fed chair to pressure him into resigning.

Any interference with the Fed could threaten the U.S. dollar's global standing, Yardeni warned.

"The U.S. ‘specialness' would be severely tested by meddling with the Fed," they wrote, citing concerns that inflation could rise and global central banks might begin diversifying away from U.S. assets.

Still, foreign appetite for Treasuries has held up, with Canada buying a record $65.8 billion in May. "We certainly can understand why both foreign and domestic investors might be worrying about the Fed's independence," Yardeni said.

Source: Investing.com