The dollar regained its losses, stabilising against major currencies. EUR/USD is nearly unchanged at 1.1625, with USD/JPY slightly down by 0.1% to 147.68, after earlier dipping to 147.00. GBP/USD remains stable at 1.3454, while USD/CHF has recovered from an earlier low to 0.8055. Meanwhile, AUD/USD decreased by 0.1% to 0.6471.
US President Trump announced his intention to dismiss Fed governor Lisa Cook over allegations of mortgage fraud. This has stirred the markets, though Trump’s authority to remove a Fed governor is not absolute and requires just cause. No president has previously threatened Fed independence to this extent.
Impact on Dollar Status
The situation is unprecedented, affecting the dollar’s status while legal proceedings play out. Cook faces unproven mortgage fraud allegations, and her removal would need to meet the “for cause” standard. Legal challenges are expected, possibly requiring court rulings for Cook to remain as Fed governor.
Trump has previously relied on the Supreme Court to overturn decisions, and might seek to do so again. However, the Fed is seen as a unique institution requiring special protection. Whether the Supreme Court will preserve this principle or align with Trump’s demands remains uncertain.
The initial shock from this morning’s news has given way to major uncertainty, and that is what we need to trade. The VIX, a key measure of market fear, spiked above 24 today from a summer average of around 18, showing that traders are rushing to buy protection. This means we should expect elevated volatility to be the new normal for the next several weeks as this legal battle unfolds.
Trader Reactions and Market Moves
For currency traders, the dollar’s quick rebound suggests the market is not yet pricing in a full-blown crisis, but the risk is now clearly defined. One-month implied volatility on EUR/USD options has surged to 9.5%, the highest since the banking turmoil we saw back in 2023, indicating big price swings are expected. This makes buying options strategies like straddles, which profit from large moves in either direction, more appealing than holding a simple directional position.
This conflict strikes at the heart of future interest rate policy, which is the bedrock of dollar valuation. Looking at Fed funds futures, the market is now pricing in a nearly 40% chance of a rate cut by the December meeting, up from just 15% last week. We should therefore watch options on Secured Overnight Financing Rate (SOFR) futures to position for these shifting expectations on monetary policy.
We’ve seen political pressure on the Fed before, particularly when looking back at the 1970s, which ultimately led to runaway inflation and a weaker dollar. That historical precedent suggests that any sign of crumbling Fed independence could be a trigger for long-term dollar weakness. Derivative positions that hedge against or speculate on higher inflation over the next one to two years could become increasingly prudent.
The legal process will be slow, and the final decision may rest with the Supreme Court, which adds another layer of unpredictability. Given the Court’s recent decisions on executive power this year, the outcome is far from certain. Therefore, we should consider longer-dated options expiring after key court deadlines to position for the binary outcome of this institutional clash.
