Dollar drops as US Justice Department subpoenas Fed's Powell

By Karen Brettell NEW YORK, Jan 12 (Reuters) – The dollar fell on Monday after the U.S. Department of Justice threatened to indict Federal Reserve Chair Jerome Powell over comments to Congress about a building renovation project, raising concerns about the independence of the U.S. central bank and the long-term outlook for the currency. Powell on Sunday said the Fed had received subpoenas from the Justice Department last week about remarks he made to Congress last summer on cost overruns for a $2.5 billion building renovation project at the Fed's headquarters in Washington. He called the action a "pretext" for the White House to gain more influence over interest rates, which U.S. President Donald Trump wants cut dramatically. Trump did not direct Justice Department officials to investigate Powell, White House press secretary Karoline Leavitt said on Monday. "This just ended the dollar's New Year bounce," said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York. "The subpoenas have probably overwhelmed the geopolitics." Trump is expected to replace Powell with a more dovish Fed chief when Powell's term ends in May, though Powell may remain as a Fed governor. Trump will interview BlackRock's chief bond investment manager Rick Rieder on Thursday, Fox Business Network reported on Monday. Rieder is among four finalists under consideration to succeed Powell. U.S. Senator Lisa Murkowski on Monday threw her support behind fellow Republican Thom Tillis' plan to block Trump's Fed nominees due to the Justice Department investigation. The dollar index, which measures the greenback against a basket of currencies including the yen and the euro,fell 0.37% to 98.87, with the euro up 0.29% at $1.1671. The Swiss franc was among the best performers on Monday, with the dollar weakening 0.54% against the currency to 0.797. MARKETS AWAIT TARIFFS RULING The dollar was boosted on Friday after a solid U.S. jobs report for December further reinforced expectations that the Fed will hold rates steady at its January 27-28 policy meeting.  Fed funds futures pricing shows that the next rate cut is now seen as unlikely until June. The next major U.S. economic focus will be the release on Tuesday of the consumer price inflation report for December. The greenback has also been supported this year by a safe-haven bid on rising geopolitical concerns after the U.S. took Venezuelan leader Nicolas Maduro into custody and as Trump expresses his desire for the U.S. to acquire Greenland. Developments in Iran have also become a key focus. Iran said on Monday it is keeping communications open with the U.S. as Trump weighed responses to a deadly crackdown on protests that have posed one of the biggest challenges to clerical rule since the 1979 Islamic Revolution. "We see near-term crosswinds for USD, with support emanating from a still-stable US macro/Fed policy backdrop and brewing geopolitical risks," Nomura FX analysts led by Craig Chan said in a report on Monday. "The current factors driving a weaker USD include Fed independence risk and expectations of an eventual US Supreme Court (SC) ruling against Trump’s IEEPA tariffs," they added. The Supreme Court is due to rule on the legality of Trump's tariff policies implemented under the International Emergency Economic Powers Act, with a decision possibly coming as soon as Wednesday. Trump is expected to find alternative ways to enact the trade levies if the current ones are struck down. The U.S. Treasury has more than adequate funds to pay any tariff refunds ordered in the event of a Supreme Court ruling, U.S. Treasury Secretary Scott Bessent said on Friday. YEN WEAKENS TO ONE-YEAR LOW Against the Japanese yen, the dollar strengthened 0.15% to 158.12. It earlier reached a one-year high of 158.19. "The problem is that last week Japan reported very weak, disappointingly so, labor earnings and the (Bank of Japan) had really tied the normalization of monetary policy to higher wages," Chandler said. "The market has pushed back just a little bit the timing of BOJ rate hikes." Japan's real wages fell in November at the fastest pace since last January, dragged down by a sharp drop in one-off bonus payments, preliminary government data showed on Thursday. Meanwhile, the coalition partner of Japanese Prime Minister Sanae Takaichi's party said on Sunday she might hold a snap election in February in a bid to capitalize on her strong public approval ratings since taking office in October. Takaichi's policies, which favor big spending and a dovish BOJ stance, have weighed on the Japanese currency. In cryptocurrencies, bitcoin gained 1.15% to $91,699. (Reporting by Karen Brettell; Additional reporting by Stefano Rebaudo; Editing by Paul Simao and Cynthia Osterman)

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