Dollar Slips as DOJ Drops Probe of Fed Chair Powell, Clearing Path for Warsh Nomination

Dollar Falls Amid DOJ Closure and Iran-U.S. Peace Talks

The dollar declined on Friday, pressured by the Justice Department's decision to close its investigation into Federal Reserve Chair Jerome Powell and growing optimism that talks to end the U.S.-Israeli war with Iran could be on the horizon. U.S. Attorney Jeanine Pirro announced that she had instead asked the Fed's internal watchdog, the Office of Inspector General, to examine cost overruns in renovations of the central bank's Washington headquarters.

The closure of the DOJ investigation clears a significant hurdle for the confirmation of Kevin Warsh, President Donald Trump's pick to lead the central bank. Warsh has been seen as a more dovish candidate than Powell, preferring trimmed mean and median inflation measures, which are below the core inflation readings that Powell has focused on. This could lead to him trying to implement more interest rate cuts than Powell would have.

As a result, Fed funds futures traders are now pricing in 38% odds of an interest rate cut by year-end, up from 23% earlier on Friday. The dollar index, which measures the greenback against a basket of currencies including the euro, fell 0.28% to 98.55, with the euro up 0.27% at $1.1714. The dollar index is heading for a weekly 0.32% gain, with the euro on track for a 0.41% weekly loss.

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The dollar also fell after Iran's Foreign Minister Abbas Araqchi was expected in the Pakistani capital Islamabad on Friday to discuss proposals for restarting peace talks with the United States. However, Pakistani sources said he was not due to meet U.S. negotiators there. Trump plans to send special envoy Steve Witkoff and Jared Kushner to Islamabad soon for talks with Araqchi.

The outcome of the conflict remains uncertain, and many traders remain reluctant to take on large positions, keeping the market largely range-bound. "Right now you really can't have anything on the table because you don't know where this is going," said Lou Brien, strategist at DRW Trading in Chicago.

Central banks are set for key policy meetings, with the Federal Reserve, the Bank of Japan, the European Central Bank, and the Bank of England among those set to announce policy decisions. "Going forward, we do think that instead of the Iran war, we're going to start to transition to a new theme, which is central bank divergence, where the Fed's likely to continue easing interest rates, whereas other central banks around the world are actually going to be hiking," said CIBC's Noah Buffam.

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The Fed is expected to remain on hold next week as policymakers contend with the risk of a renewed bout of inflation from the Iran war and as U.S. economic data points to a resilient economy. The European Central Bank is expected to hold its deposit rate on April 30, but just over half of economists polled by Reuters forecast a hike in June, as policymakers look to shield the euro zone economy from a war-induced energy shock.

In Japan, core consumer inflation slowed below the Bank of Japan's 2% target for a second consecutive month in March. Analysts expect price pressures to pick back up in the coming months as companies begin passing on higher fuel costs stemming from the Middle East conflict. The BOJ is set to conclude its two-day policy meeting on Tuesday and is widely expected to hold interest rates steady, as fading prospects for a near-term end to the war keep Japan's economic and price outlook highly uncertain.