A Rally in Treasury Bonds, a Slump in the Dollar as Trump Looks for Powell's Successor

The U.S. dollar declined and Treasury prices rose on Thursday following reports that President Donald Trump may name a successor to Federal Reserve Chair Jerome Powell months before his term ends in May of next year. According to The Wall Street Journal, Trump is considering making his decision public by September or October.

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This development comes after weeks of mounting pressure from Trump urging Powell to lower interest rates. Market observers believe any new nominee chosen by the president would likely align with his preference for looser monetary policy.

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That possibility has fueled speculation that interest rate cuts could come sooner and be steeper than current market expectations. However, naming a successor this early could also disrupt markets by introducing uncertainty as investors would have to pay attention to both Powell’s ongoing statements and the incoming candidate’s views.

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Michael Pfister, a foreign exchange strategist at Commerzbank, warned that this scenario could weaken Powell’s authority in his remaining months, potentially prompting earlier rate cuts. “There’s a growing risk Powell will be seen as a lame duck,” he said, “and that may push the Fed toward action before his term officially ends.”

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Among those considered possible replacements are former Fed Governor Kevin Warsh, current Fed Governor Christopher Waller, National Economic Council Director Kevin Hassett, former World Bank President David Malpass, and U.S. Treasury Secretary Scott Bessent, according to past reporting by Bloomberg. Trump himself recently stated that he has narrowed his shortlist to three or four individuals.

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Recent comments from Fed officials, including Waller and fellow Trump appointee Michelle Bowman, have reinforced market expectations for a rate cut as early as July. As a result, traders have increased their bets on near-term easing. The probability of a 25-basis-point cut at the upcoming Fed meeting rose from 0% to 20% in just a few days, while the expected total rate reduction for the year jumped from 50 to 62 basis points.

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These shifting expectations were also visible in bond markets. Yields on two-year Treasuries—which tend to react most quickly to changes in Fed policy—dropped by nearly 20 basis points over the past week, settling at 3.75% on Thursday, the lowest level in nearly two months. Meanwhile, traders have reportedly amassed a record volume of futures bets that anticipate Trump’s nominee will pursue rapid rate cuts.

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This growing anticipation of lower U.S. interest rates has also pressured the dollar. The greenback weakened against all major currencies in the Group of 10, with Bloomberg’s Dollar Spot Index tumbling 0.6% to its lowest point in over three years. Commerzbank’s Pfister said that if central bank sentiment continues to move in favor of earlier rate reductions, the euro could climb to $1.18 soon.

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Francesco Pesole, a currency analyst at ING, noted that Powell remains under heavy scrutiny from the Trump administration. “Now that other Fed officials are publicly challenging his more cautious approach,” he said, “markets may quickly adjust expectations downward, especially in response to softer economic data.”

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On that note, investors are awaiting a batch of U.S. economic indicators due Thursday, including initial jobless claims, new orders for durable goods, home sales, and the final estimate for first-quarter GDP. A number of Fed officials—Austan Goolsbee, Tom Barkin, Mary Daly, Beth Hammack, and Michael Barr—are also scheduled to deliver speeches, which could influence market sentiment further.

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Despite mounting pressure, Powell has maintained his message that there’s no need to rush into cutting rates. During testimony before the Senate Banking Committee this week, he emphasized that current economic readings reflect past trends and that economists are projecting higher inflation later in the year, partly driven by tariff increases.

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Simon Dangoor, who leads fixed income macro strategies at Goldman Sachs Asset Management, offered a more measured perspective, stating that Trump’s approach to Fed appointments has so far been relatively conventional. “Let’s not forget, Trump appointed Powell in the first place,” Dangoor noted. “We should be cautious about taking all his rhetoric literally.”

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Still, traders in the currency derivatives market appear increasingly convinced the dollar could fall further. One-month risk reversals, a key indicator of market sentiment, showed one of the sharpest bearish swings on the greenback in history over a three-day stretch—marking the ninth-largest decline ever recorded.

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Elias Haddad, a strategist at Brown Brothers Harriman, warned that Trump’s early move to unofficially name a successor could hurt the Fed’s standing. “Putting forward a so-called ‘shadow’ chair before Powell’s term ends risks damaging the central bank’s credibility,” he explained. “It introduces conflicting signals that will only confuse markets and undermine the Fed’s reputation for being politically neutral.”

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