Dollar Setback Linked to Kugler and McEntarfer Departures
- Written by: Gary Howes
File image of Governor Kugler. Source and copyright: U.S. Federal Reserve.
Dollar exchange rates have reversed recent gains, with the departure of two leading public figures in the U.S. said to be playing a part.
Analysts warn confidence in the USD has been affected by U.S. President Donald Trump's unexpected and unprecedented decision to fire U.S. Bureau of Labor Statistics (BLS) commissioner, Erika McEntarfer.
Trump's decision to remove McEntarfer rested on his allegation that the BLS "rigged" the statistics to "make the Republicans, and me, look bad," when the U.S. economy was, in fact, "booming". This after the BLS reported a sharp slowdown in hiring in July, and slashed estimates for the preceding two months.
For markets, the decision is significant and risks undermining the soundness of the USA's institutions, which underpin the country's economic outperformance and attractiveness to global investors.
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"Trump's recent public criticism and dismissal of the Bureau of Labour Statistics (BLS) chief following the disappointing NFP report, accusing her without evidence of manipulating the monthly jobs report for 'political purposes', may temporarily undermine the credibility and perceived integrity of U.S. economic data," says Christopher Wong, FX and Rates Strategist at OCBC.
He explains that owing to the decision, confidence in the USD has been affected.
"This casts doubt on the reliability of future reports and suggests possible political interference, whether directed at the BLS chief or Fed Chair Powell, who has also faced criticism for not cutting rates sooner. Such developments could erode market confidence in the USD."
The Dollar has lost value against the Pound, Euro and other major currencies over the course of the past three trading days following a soft U.S. labour market report that suggested the economy continues to shed jobs, opening the door for the Federal Reserve to cut interest rates as soon as September.
As markets adjust for rate cuts, short-term U.S. bond yields fall.
However, the firing of McEntarfer came on the same day that Federal Reserve Governor Kugler would vacate her position on the Board of Governors effective August 08.
Kugler has a proven to be a cautious member of the Fed's board, preferring to wait before cutting interest rates again. Trump will likely replace her with someone more inclined to cut rates, which will increase a 'dovish' slant on the Board, making it more prone to cut interest rates going forward.
This implies lower interest rates, which would naturally weigh on the Dollar.
"This could introduce an additional dissenting voice within the Fed, potentially influencing other members and further adding momentum to the 'sell USD' trade," says Wong.
"Kugler’s resignation is speeding up the Fed Chair selection process that was supposed to last until the end of the year if we are to believe Bessent’s remarks last week. However, it could also accelerate the Fed’s cutting cycle," says a note from Rabobank out Tuesday.
But it also raises questions about the Fed's credibility and its desire to make the hard decisions to target lower inflation, which would impact investor perceptions about U.S. assets.
One driver of USD weakness in 2025 has been Trump's attacks on the Fed and Chair Jerome Powell. Recent developments suggest concerns about Fed indepdence, and now broader institutional credibility, will remain a feature of the coming months.
