FOREX-Dollar firms but worries linger over Fed independence

By Rae Wee and Jaspreet Kalra

SINGAPORE, Aug 27 (Reuters) - 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 U.S. currency's rise.

The euro EUR=EBS was down about 0.4% at $1.1593 and sterling GBP=D3 slipped 0.3% 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 U.S. 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 U.S. Treasury yield US2YT=RR, which typically reflects near-term rate expectations, bottomed at 3.6540% on Wednesday, its lowest since May 1, as traders ramped up bets of imminent Fed cuts. 0#USDIRPR

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 US30YT=RR was last a touch higher at 4.9223%. US/

The U.S. 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% chance of a 25 basis point rate cut in September, according to the CME's FedWatch tool.

Elsewhere, political developments in France are likely to remain in focus for the euro as Prime Minister Francois Bayrou battles to save his minority government.

"While not ignoring the political risks in France in the short term, we are also mindful of European Central Bank President Christine Lagarde’s optimism on the economic recovery and her ambition for the EUR to gain a larger international role," analysts at DBS said in a note.

French government bonds steadied on Wednesday, a day after the yield on the 10-year benchmark bond FR10YT=RR climbed to its highest level in five months. European ratings agency Scope sees a French government collapse as the most likely outcome.

Among other currencies, the U.S. dollar rose about 0.2% each against the Japanese yen JPY=EBS and the Swiss franc CHF=EBS while the New Zealand dollar was last down 0.4% to $0.5834.