The US dollar experienced a decrease following a legal development involving Fed Governor Lisa Cook. A US Federal judge prevented former President Trump’s attempt to remove Cook from her position on the Federal Reserve Board. The court directed Chair Powell and the Board of Governors to allow her to continue serving for the duration of the legal proceedings.
This legal situation contributed to a decline in the USD. The dollar remained sluggish, despite geopolitical tensions involving Russian actions towards Poland. Reports indicated Russian drones breached NATO airspace by entering Poland. A US congress member referred to Russia’s activities in Poland as an act of war, while the Polish military confirmed ongoing operations to counter the Russian incursion, with weapons being deployed.
The Federal Reserve Focus
The dollar’s dip on the Federal Reserve news seems to be the market’s primary focus, but we see this as a distraction. The court’s decision to keep Governor Cook in her post suggests a more independent Fed, leading traders to price out some of the more aggressive rate cuts they expected. Looking back at market data from early 2025, Fed funds futures had priced in a full percentage point of cuts by this time next year, a figure that has already pulled back to 75 basis points in the last few hours.
This focus on the Fed is causing a dangerous complacency regarding the events in Eastern Europe. An active military engagement between Russia and a NATO member like Poland is a severe risk-off event that should be sending capital flooding into the US dollar as a safe haven. We saw this play out clearly in February 2022, when the Dollar Index (DXY) jumped from 96 to over 103 in the weeks following Russia’s initial invasion of Ukraine.
The market’s current muted response is a significant mispricing of risk and presents a clear opportunity. Volatility is unusually low given the gravity of the news from Poland, with the VIX index hovering near 14, a level inconsistent with the brink of a major conflict. We should be actively buying volatility through VIX calls or futures, as any escalation would almost certainly cause a sharp spike from these depressed levels.
European Currency Vulnerabilities
This situation makes European currencies look especially vulnerable, particularly the Euro and the Polish Zloty. The dollar’s current softness provides an attractive entry point for long positions against these currencies. We believe establishing long USD/PLN positions or buying call options on the dollar against the euro is a prudent way to position for the flight to safety that has historically followed such events.
Furthermore, any conflict involving Russia would immediately threaten global energy supplies and drive a rush into hard assets. We should anticipate a sharp rise in the price of crude oil and gold. Acquiring call options on both Brent crude futures and gold ETFs allows for upside exposure to the geopolitical risk premium that we believe is currently being ignored by the wider market.
