FOREX-Dollar falls as Trump's move to fire Fed governor spooks investors

(Updates to Europe afternoon, adds comment)

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Trump fires Governor Cook amid push for more influence at Fed

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Cook's removal highlights worries over Fed independence

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EUR, GBP lead gains against U.S. dollar

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French bonds tumble as government faces collapse

By Jaspreet Kalra

MUMBAI, Aug 26 (Reuters) - The dollar stumbled against major currencies on Tuesday as U.S. President Donald Trump's unprecedented move to fire Federal Reserve Governor Lisa Cook renewed concerns over the central bank's independence. The euro and sterling were up about 0.3% against the dollar at $1.1654 and $1.3491, respectively. Against the Japanese yen, the dollar was down 0.2% to 147.41 yen and it dipped against the Swiss-franc as well.

Trump said he was removing Cook over alleged improprieties in obtaining mortgage loans, a step that could test the boundaries of presidential power over the Fed. In response, Cook said Trump has no authority to fire her from the central bank, and she will not resign. "Challenges to Fed independence pose clear downside risks to the Dollar in our view, owing in this case to both concerns around US institutions, and to the read-through to lower front-end US yields," analysts at Goldman Sachs said in a note.

Trump's announcement surprised markets but the reaction was relatively muted with investors

caught between

the concerns over politicization of policy and the payoffs for markets.

The president has repeatedly berated Fed Chair Jerome Powell for not lowering interest rates, though he has stopped threatening to fire him ahead of the end of his term in a little under 9 months.

"The story has been well-telegraphed," said Kenneth Broux, head of corporate FX and rates research at Societe Generale, referring to Trump's push for lower benchmark borrowing costs.

Money markets are currently pricing in a near 81% probability of a rate cut at the Fed's September meeting.

Morgan Stanley on Tuesday became the

latest brokerage

to forecast a cut in interest rates in September, joining global peers after Powell hinted at policy-easing next month in a speech last week.

While investors may be inclined to sell the dollar, lingering economic and fiscal worries in Europe also narrow the available currencies to bet on a decline in the U.S. currency, Broux said.

France's government bonds fell on Tuesday as the country's minority government looked increasingly likely to be ousted next month, with main opposition parties saying they would not back a confidence vote announced by Prime Minister Francois Bayrou over his plans for sweeping budget cuts. The 10-year government bond yield rose to a peak of 3.53%, its highest since March and adding to Monday's 7 basis point climb. Bond yields move inversely to prices.

Worries over renewed political instability in France added to jitters in global bond markets about the independence of the U.S. Federal Reserve, which contributed to selling in government bonds from the U.S., Britain and Japan.

"The broader question for the euro is whether recent French news destabilises appetite for the euro more broadly, or whether this is an isolated French issue," analysts at ING said in a note. Cryptocurrencies remained choppy with bitcoin last up 0.2%, attempting to break a three-day losing streak, while ether climbed 1.5%. (Reporting by Jaspreet Kalra Editing by Sam Holmes, Kirsten Donovan and Chizu Nomiyama )