US legal chaos undermines the dollar

The lawsuit against Fed Chairman Jerome Powell has put a sharp spotlight on the dollar's downside risk. Another lawsuit has even made the risk slightly higher than currency markets are currently pricing in.

If a central banker fails to do their job properly, the consequences can be enormous. And this is far from limited to letting inflation get out of control. Jerome Powell, as chairman of the US Federal Reserve, is now accused of a completely different misstep. According to an indictment based on his testimony before Congress last year, he allegedly spent excessive amounts of government money on the renovation of the Fed headquarters.

Juicy revelations
The trial will undoubtedly yield a whole series of juicy revelations. To what extent was it really necessary to build a beautiful rooftop garden? But how much of the cost can also be traced back to the unfortunate placement of the Fed headquarters, which was built in 1937 on a filled-in swamp? The answer to that question will likely come long after Powell steps down. His term ends on May 15, and Trump will likely appoint a successor soon. Another danger to the dollar lurks this week in a trial that is receiving far less attention than the charges against Powell.

Cross out the trade measures
The US Supreme Court is expected to rule on Wednesday whether Trump was indeed justified in imposing all sorts of import duties on a whole range of trading partners. Last Monday, the US president warned that it would bode ill for the United States if the highest court struck down the trade measures. In that case, hundreds of billions in wrongly withheld duties would have to be compensated. Moreover, such a ruling would open the door for countries to submit a bill for the costs incurred in shifting production processes to their domestic markets.

When will things really get out of hand?
In this scenario, the dollar would likely fall overnight to the lower end of the €0,84 to €0,87 range it has been trading in since June. Moreover, the escalating legal uncertainty is signaling a shift in the currency landscape. The dollar's safe-haven status—already under pressure from Trump's unpredictable trade policies and rising US government debt—is at risk of further damage. Those doing business in dollar-denominated countries are wise to carefully assess and hedge their currency risks. Due to the calm exchange rate movements of recent months, the cost of hedging is relatively low, while the risk of a swell in the currency markets is rapidly increasing.                                     

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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