USD Resilience: Strong Data Cushions Political Volatility as Trump Targets Fed

The US Dollar Index (DXY) held steady above 97.40 on Tuesday, caught in a tug-of-war between supportive macroeconomic data and escalating institutional friction in Washington. While a government shutdown has been averted, investor attention has shifted to President Trumps aggressive stance on Federal Reserve independence.

Key Market Data

• DXY: Held steady above 97.40
• US ISM Manufacturing PMI: 52.6 (Highest since August 2022)
• New Orders: Surged to 57.1
• 10-year Treasury Yield: Stabilized near 4.27%

Manufacturing Rebound Signals Soft Landing

Providing a floor for the Greenback, the latest US ISM Manufacturing PMI staged a surprise return to expansion, climbing to 52.6 in January. This marks the highest level since August 2022 and defies predictions of a manufacturing recession.

The data suggests the US economy continues to run hotter than its peers, forcing bond markets to maintain high yields. The 10-year Treasury yield stabilized near 4.27%, reinforcing the dollar's carry advantage.

Constitutional Friction: The Fed Under Fire

Despite the economic strength, political risk premiums are arguably capping the dollar's upside. Reports confirm President Trump is pressing for a criminal investigation into Fed Chair Jerome Powell, a move widely interpreted as an attack on central bank independence.

The controversy is entangled with the nomination of Kevin Warsh to succeed Powell. Warsh, known for his critiques of “institutionalized QE” (Quantitative Easing), is viewed by markets as a hawk who favors normalizing the Fed's balance sheet.

Strategists at Morgan Stanley warn that while Warsh represents a hawkish policy shift—potentially dollar-positive—the erosion of institutional norms could introduce long-term volatility to US assets.

Shutdown Averted

In a separate victory for market stability, the threatened partial government shutdown appears to have been avoided. Following pressure from the White House, House Republicans and Democrats reached a tentative agreement on spending and immigration enforcement.

The resolution removes an immediate liquidity risk from the table, allowing markets to refocus on the upcoming Non-Farm Payrolls (NFP) data, which was delayed due to the standoff but remains critical for the Fed's next move.