Dollar firms but worries linger over Fed independence

The dollar advanced against the euro and sterling on Wednesday but investor concerns over the Federal Reserve's independence continued to linger, potentially limiting the US currency's rise.

The euro was down about 0.4 percent at $1.1593 and sterling slipped 0.3 percent to $1.3441, giving back some of the gains spurred by Trump's announcement on Monday that he would fire Fed Governor Lisa Cook over alleged improprieties in obtaining mortgage loans.

Cook's lawyer later said she would file a lawsuit to prevent her ouster, kicking off what could be a protracted legal fight.

Trump's unprecedented bid to remove the Fed Governor adds to the relentless pressure he has put on the central bank to lower interest rates since he returned to the White House this year.

While the dollar appears to have shaken off immediate worries over Fed independence, Trump's actions have contributed to the steepening of the US Treasury yield curve.

"Trump has essentially usurped the Fed's forward guidance function for the time being and telling markets lower rates are coming, which is being manifest in a steeper yield curve," said Jamie Cox, managing partner for Harris Financial Group.

The two-year US Treasury yield , which typically reflects near-term rate expectations, bottomed at 3.6540 percent on Wednesday, its lowest since May 1, as traders ramped up bets of imminent Fed cuts.

Yields on the longer end of the curve have meanwhile risen on concerns that premature easing of monetary conditions could lead to a resurgence in inflation.

The 30-year yield was last a touch higher at 4.9223 percent.

The US dollar's resilience "could be a reflection that market participants are still waiting for stronger confirmation from the release of the August NFP and inflation reports that the Fed will follow through with plans to resume rate cuts next month," said Lee Hardman, senior currency analyst at MUFG.

Money markets are currently pricing in a 87 percent chance of a 25 basis point rate cut in September, according to the CME's FedWatch tool.

US stocks ended slightly higher on Tuesday, with the Dow adding three-tenths of a percent, and the S&P 500 and Nasdaq each gaining about four-tenths of a percent.