The pound briefly hit its highest level against the dollar for almost four years after markets were unnerved by a report that US President Donald Trump could bring forward the naming of the new head of the US central bank.
Sterling rose above $1.37, which is the strongest since October 2021.
The dollar weakened after the Wall Street Journal reported Trump had considered naming Jerome Powell’s replacement as head of the Federal Reserve by September or October.
The US Fed is independent from the government and Mr Powell chairs a committee that decides on interest rates which have remained unchanged this year, prompting a series of angry outbursts from Trump.
On Wednesday, Trump called Mr Powell “terrible” and said he was looking at “three or four people” who could replace him. Mr Powell’s term is due to end in May 2026.
There are concerns the US president could install someone who is sympathetic to his demands.
Earlier this week, Mr Powell told US lawmakers the Fed would wait and see how the American economy reacts if Trump’s so-called retaliatory tariffs against a range of countries come into force next month, after being paused until 9 July.
The Fed is concerned that the levies, which are paid by the businesses importing the goods, might push up inflation.
The US economy shrank in the first three months of this year – the first decline for three years – as government spending fell and imports rose as firms raced to get products into the country before the tariffs went live.
JP Morgan, the investment bank, has lowered the chance of the US economy falling into recession this year but at 40% the probability of a slowdown remains comparatively high.
Kaspar Hense, a senior portfolio manager at RBC BlueBay Asset Management, said traders were betting the dollar would fall “in this environment, where there is an erosion of institutions”.
While Kit Juckes, chief FX strategist at Societe Generale, said: “I think the market is pricing in President Trump appointing someone who at least at first sight appears more sympathetic to his cause.”
Academics have said that confidence in the Fed’s independence is key to maintaining financial markets’ faith that inflation will be controlled.
If this confidence is shaken, it could lead to higher borrowing costs for everyone if investors demand higher interest rates for holding debt.
There is speculation that Kevin Warsh, a former governor at the Fed, may be considered for the role.
Earlier this month, Trump was asked about whether Warsh could become the Fed’s chair, to which he replied: “He’s very highly thought of.”
US Treasury Secretary Scott Bessent could also be a candidate, according to reports.
He recently told lawmakers in the House of Representatives that he currently has “the best job” in Washington and is “happy to do what President Trump wants me to do”.
Mr Powell was himself a Trump appointee. During Trump’s first term in the White House, Mr Powell replaced the then Fed chair Janet Yellen.
Trump had criticised Ms Yellen for keeping interest rates too low, stating: “I think she should be ashamed of herself.”
Ms Yellen went on to become the US Treasury Secretary under President Joe Biden and said she did not think that Trump had a grasp of macroeconomic policy.
