By Michalis Florentiades*
The dollar sustained pressure last week after the US Justice Department launched a criminal investigation into Federal Reserve chair Jerome Powell over renovations to the Fed’s buildings—a move that cranked tensions between the American government and the central bank up to eleven.
Powell isn’t having it. He’s called the threats a “pretext” designed to pile more pressure on the Fed to slash interest rates more aggressively. “The threat of criminal prosecution is a consequence of the Federal Reserve setting rates based on our best judgement of what serves the public interest, rather than following the President’s preferences,” the Fed chair noted.
Despite the initial knock to the US dollar, expectations for the Fed’s monetary policy path through 2026 haven’t shifted much. Investors are still pricing in rate cuts totalling roughly 53 basis points (0.53%) by December, with the next 25-basis-point cut now seen as a dead cert for June—especially after December’s inflation figures came through.
Still, there’s growing unease in the market about the ongoing clash between President Trump and Powell. If the US President keeps undermining the central bank’s independence, we could soon see a sell-off of American assets, including US equities.
Gold surged sharply following news of potential criminal charges against the Fed chair, notching a fresh all-time high above the $4,600 zone.
Geopolitics takes centre stage
The week’s news cycle was dominated by geopolitical developments, particularly around Iran. Investor nerves remain frayed as President Trump keeps up his bellicose rhetoric. With the situation in Iran still critical, the American President announced that help is on its way to protesters. Some analysts are pricing in military action—a prospect made all the more concerning by statements that could well backfire, rallying Iranians against a common enemy.
Commodity markets watched these developments closely on Wednesday, with gold, silver, and oil taking centre stage. Gold and silver are hitting fresh all-time highs on an almost daily basis, with the latter already posting explosive gains in 2026.
Meanwhile, thanks to yet another drone strike in the Black Sea and Trump’s sabre-rattling, oil climbed to a two-month high last week.
But Trump’s declaration that he’d “like to see oil at $53 a barrel” muddies the waters for black gold. Given that most shale deposits aren’t profitable at that price level, the question arises: is the US President trying to cripple oil producers like Russia, or is he positioning himself for November’s midterm elections by keeping energy prices down?
Yen tumbles as Takaichi weighs snap election
The currency that suffered the biggest losses against the dollar this week was the yen, with the yen-dollar exchange rate nearly touching 160.00.
The Japanese currency is weakening following reports that Japan’s Prime Minister Sanae Takaichi is planning to call a snap election in February to expand the ruling coalition’s majority in the lower house. With approval ratings hovering around 70%, she may well feel confident enough of a victory that would allow her to push ahead more freely with fiscal spending plans—further ballooning an already swollen public debt.
Such a scenario could drive bond yields higher and weaken the Japanese currency further. However, the yen may well remain under pressure even before the election, as this situation effectively ties the Bank of Japan’s hands until then. So at best, the central bank’s next rate rise could come after the spring wage negotiations—and only if those result in satisfactory pay increases.
Nevertheless, as the dollar-yen rate approaches the 160.00 zone once again, we may see fresh intervention warnings from the finance ministry and, if those don’t work, actual measures can’t be ruled out.
*Chief Economist, Trading Point Market Analysis.