Invesco: Dollar, U.S. Rates to be Pressured By Fed Investigation

U.S. President Donald Trump, who repeatedly criticised the Fed's monetary stance during the course of 2025. File image. Official White House Photo by Molly Riley.

But it's too soon for investors to panic.

The U.S. dollar is likely to come under pressure while U.S. interest rates face upward pressure as markets price the implications of a Justice Department investigation into the Federal Reserve, Invesco says.

Invesco says erosion of confidence in the U.S. institutional framework would weigh on the dollar, a dynamic that would be supportive of moves higher in major counterparts such as EUR/USD and GBP/USD if dollar weakness broadens, while higher U.S. yields could add volatility to those pairs.

The asset manager - with some $2.1 trillion in assets under management - says the prospect of legal action against the Fed introduces a new risk premium into U.S. markets that had not previously been reflected in pricing.

“The independence of the central bank is critical,” Invesco says, adding that it is “a foundational principle of modern macroeconomic management and a cornerstone of financial market confidence.”

The dollar fell on news Trump administration’s Department of Justice is opening an investigation into the Fed and has raised the possibility of a criminal indictment linked to Chair Jerome Powell’s testimony on cost overruns tied to the Fed’s building renovation.

Powell and even Republican lawmakers have publicly pushed back, which has raised hopes the White House will be curtailed, limiting the dollar's losses.

Above: The dollar index shows the USD has recovered initial losses following the news of legal action being taken against the Fed.

In 2025, markets absorbed political pressure on the Fed without significant disruption, with risk assets holding up and inflation expectations in the bond market remaining anchored.

However, Invesco says the potential use of the justice system against a sitting Fed chair represents a line markets have not previously had to price, creating what it calls a material near-term challenge for risk assets.

“The most immediate implication is likely upward pressure on interest rates, driven by higher inflation expectations,” Invesco says.

The firm says higher rates would likely weigh on U.S. equity valuations and that confidence in U.S. economic institutions has long been a pillar of dollar strength, making the currency vulnerable if that confidence erodes.

"Higher rates, in turn, are likely to weigh on US stock valuations, particularly for sectors and styles that are most sensitive to changes in discount rates. The US dollar is also likely to come under pressure," it says.

Invesco says alternatives such as gold and other perceived safe-haven assets could benefit, alongside silver and possibly bitcoin, as some investors seek hedges against institutional instability.

Polymarket shows a near 70% expectation that Powell leaves the Federal Open Market Committee before his term ends in May, while noting scenarios in which he could remain on the Fed’s board even if he steps down as chair.

Invesco says these developments reinforce its view that U.S. assets will lag those of emerging markets, Europe and Japan, given relatively extended U.S. valuations and sensitivity to higher rates and a weaker dollar.

The firm says it favours caution rather than panic, adding that markets could still constrain policy if reactions become disruptive or politically costly.