The U.S. dollar experienced a dip following reports that the Department of Justice (DoJ) has launched a criminal investigation into the renovation of Federal Reserve buildings in Washington. This development comes alongside Jerome Powell's upcoming testimony to Congress, adding to the market's jitters. Steve Englander, head of global G10 FX Research at Standard Chartered, suggests that the initial market reaction may be short-lived if the investigation doesn't result in formal charges.

Englander points out that subpoenas and investigations don't equate to guilt, and the absence of charges could even imply a presumption of innocence. He believes that an indictment would be difficult to substantiate, as it would require prosecutors to allege intent to deceive. Consequently, if an indictment is unlikely, the current weakness in the USD could be temporary.

However, if an indictment does occur, even if marginally credible, it could be seen as sufficient cause for Powell's dismissal. This scenario extends beyond Powell, potentially affecting other Fed governors and raising concerns about the Fed's independence. Such a development would likely lead to expectations of easier monetary policy, negatively impacting the dollar.

While the greenback may stabilize as markets await clarity, U.S. Treasuries could be more vulnerable. The yield curve has already shown signs of bear-steepening due to renewed uncertainty around Fed independence. Upcoming Treasury auctions and December CPI data could further exacerbate market volatility, with weak demand or an upside inflation surprise potentially triggering a surge in yields.

If perceptions of indictment risk rise, investors may demand more term premium, opening the door to further yield upside.