Dollar slips as DOJ drops Powell probe, clearing path for Warsh
Market Reactions and Central Bank Developments
By Karen Brettell and Lucy Raitano
Dollar Weakness Following DOJ Decision
NEW YORK/LONDON, April 24 (Reuters) - The dollar fell on Friday, pressured by the Justice Department's decision to close its investigation into Federal Reserve Chair Jerome Powell and by growing optimism that talks to end the U.S.-Israeli war with Iran could be on the horizon.
U.S. Attorney Jeanine Pirro said she had instead asked the Fed's internal watchdog, the Office of Inspector General, to examine cost overruns in renovations of the central bank's Washington headquarters.
The closure of the DOJ investigation clears a significant hurdle for the confirmation of Kevin Warsh, President Donald Trump's pick to lead the central bank.
Market Interpretation and Warsh's Policy Stance
"The market's reading this as a little bit dovish," said Noah Buffam, director in FICC strategy at CIBC Capital Markets in Toronto.
Warsh prefers trimmed mean and median inflation measures, which are below the core inflation readings that Powell has focused on, Buffam said. That "could lead to him trying to get through more cuts than Powell would have."
Fed funds futures traders are now pricing in 38% odds of an interest rate cut by year-end, up from 23% earlier on Friday.
Currency Movements
The dollar index, which measures the greenback against a basket of currencies including the euro, fell 0.28% to 98.55, with the euro up 0.27% at $1.1714. The dollar index is heading for a weekly 0.32% gain, with the euro on track for a 0.41% weekly loss.
The Japanese yen strengthened 0.19% against the greenback to 159.4 per dollar. Sterling rose 0.42% to $1.3523.
Geopolitical Factors and Dollar Performance
The dollar also fell after Iran's Foreign Minister Abbas Araqchi was expected in the Pakistani capital Islamabad on Friday to discuss proposals for restarting peace talks with the United States, but Pakistani sources said he was not due to meet U.S. negotiators there.
Trump plans to send special envoy Steve Witkoff and Jared Kushner to Islamabad soon for talks with Araqchi, a U.S. official told Reuters, although it was not clear when that meeting would take place.
Market Uncertainty Amid Conflict
The U.S. currency has been pulled in competing directions throughout the conflict — buoyed at times by optimism that a near-term deal could end the fighting, then weighed down by fears that a prolonged war will trigger lasting energy disruptions.
With the outcome still uncertain, many traders remain reluctant to take on large positions, keeping the market largely range-bound.
“Right now you really can't have anything on the table because you don't know where this is going,” said Lou Brien, strategist at DRW Trading in Chicago.
“Unless there's some big news like they just all declare peace and go home, I think the next real move on the markets is going to be a reaction to real things, such as shortages of crude oil affecting economic performance in Europe or Asia,” he said.
CENTRAL BANK BONANZA LOOMS
Upcoming Central Bank Meetings
Traders are also looking ahead to a busy week for central banks, with the Federal Reserve, the Bank of Japan, the European Central Bank, and the Bank of England among those set to announce policy decisions.
Federal Reserve and Central Bank Divergence
"Going forward, we do think that instead of the Iran war, we're going to start to transition to a new theme, which is central bank divergence, where the Fed's likely to continue easing interest rates, whereas other central banks around the world are actually going to be hiking," said CIBC's Buffam.
The Fed is expected to remain on hold next week as policymakers contend with the risk of a renewed bout of inflation from the Iran war and as U.S. economic data points to a resilient economy.
European Central Bank and Bank of England Outlook
The European Central Bank is expected to hold its deposit rate on April 30, but just over half of economists polled by Reuters forecast a hike in June, as policymakers look to shield the euro zone economy from a war-induced energy shock.
The Bank of England meets on Thursday. Money markets are pricing in a rate hike by year-end, though no change is expected at next week's meeting.
Bank of Japan and Japanese Yen
In Japan, core consumer inflation slowed below the Bank of Japan's 2% target for a second consecutive month in March. Analysts expect price pressures to pick back up in the coming months as companies begin passing on higher fuel costs stemming from the Middle East conflict.
The BOJ is set to conclude its two-day policy meeting on Tuesday and is widely expected to hold interest rates steady, as fading prospects for a near-term end to the war keep Japan's economic and price outlook highly uncertain. That said, the central bank is still expected to signal its readiness to tighten policy to counter mounting inflationary pressures.
Japanese Finance Minister Satsuki Katayama on Friday reiterated her verbal warning on intervention, saying authorities stand ready to take "decisive" action against speculative moves in the foreign exchange market. Her comments came a day after she said Japan has a "free hand" to intervene and that past interventions had been effective.
Cryptocurrency Market
In cryptocurrencies, bitcoin fell 0.47% to $77,558.
(Reporting by Karen Brettell and Lucy Raitano; Editing by Nick Zieminski and Daniel Wallis)
