Dollar Surges as US Manufacturing Rebounds; Fed Political Storm Intensifies

USD/JPY climbed above 155.50 and Treasury yields surged across the curve on Tuesday after US manufacturing data shattered expectations, forcing markets to recalibrate the Federal Reserve's rate path. However, the Greenback's ascent comes against a backdrop of unprecedented political friction, as President Trump renews threats against Fed Chair Jerome Powell.

• ISM Manufacturing PMI: 52.6 (vs Forecast: 48.5)
• 10-Year Treasury Yield: 4.28% (+4 bps)
• Key Currency Level: USD/JPY > 155.50

ISM Shock: Manufacturing Expands

The Institute for Supply Management (ISM) Manufacturing PMI jumped to 52.6 in January, crossing the 50.0 expansionary threshold for the first time in nearly a year and beating the consensus forecast of 48.5.

The report signaled robust economic momentum, with the New Orders index spiking nearly 10 points. This data undermines the case for imminent rate cuts, pushing the 10-year Treasury yield up by 4 basis points to 4.28%.

“The economic outlook is improving,” the Fed noted in recent statements, a sentiment now validated by the data. Consequently, bond markets are pricing out near-term easing, providing fresh fuel for the Dollar Index (DXY) to hit one-week highs.

Trump vs. Powell: A Constitutional Clash?

While the data supports a “higher-for-longer” narrative, the governance of the Fed faces a stress test. In an Oval Office interview Monday, President Trump explicitly supported a criminal investigation into Chair Jerome Powell regarding building renovation costs, stating prosecutors should “follow it right to the end.”

Simultaneously, Trump has nominated Kevin Warsh—a former Fed Governor and associate of legendary investor Stanley Druckenmiller—to succeed Powell. However, the confirmation process faces hurdles; Republican Senator Thom Tillis has threatened to block new nominees until the investigation into Powell is resolved.

Market Implications

• USD Dominance: Strong growth data is currently outweighing political noise.
• Yield Pressure: The 10-year yield approaching 4.30% is weighing on risk assets, particularly high-valuation tech stocks.
• Fed Independence: Investors are closely watching Warsh‘s confirmation hearings for signs of whether the Fed’s traditional independence will be eroded by fiscal dominance or political pressure.