In a stunning development, the U.S. dollar dipped 0.3% against major currencies on Monday, August 25, after President Donald Trump announced the firing of Federal Reserve Governor Lisa Cook over alleged 2021 mortgage loan improprieties.
Marking the first attempt by a president to remove a Federal Reserve governor, the unprecedented move sparked fears of a constitutional crisis and threats to the Fed’s independence, triggering the decline in the dollar.
Cook defiantly rejected the dismissal, declaring, “Trump has no authority to fire me, and I will not resign,” while vowing to fight the decision in court.
Markets reacted with unease as the U.S. Dollar Index fell, 2-year Treasury yields dropped, and 10-year yields climbed, signaling uncertainty over monetary policy and inflation. Though concerns swirl about America’s financial credibility, the market response was notable but not drastic, with the full impact hinging on Cook’s legal challenge.
The dramatic confrontation pushed the euro up 0.22% to $1.1647 against the dollar, while sterling gained 0.2% to $1.3481. The dollar fell 0.27% against the Japanese yen to 147.36 and dropped 0.28% against the Swiss franc. The dollar index declined 0.28% to 98.19.
Other market instruments reacted diversely. Long-term U.S. bond yields rose, as 30-year Treasury yields climbed over 2 basis points, signaling investors’ demands for higher premiums on U.S. debt. Meanwhile, stock markets stayed relatively steady, with traders focusing on other economic data amid the turmoil.
This market unrest complicates monetary policy, as traders assign an 85% chance of September rate cuts, bolstered by Morgan Stanley and other brokerages forecasting reductions after Powell’s hints at policy easing, with consumer confidence data revealing growing household concerns over employment, further fueling dovish Fed expectations.
What’s next now in this battle of power?
Legal experts predict Cook will prevail in court. Crypto lawyer Aaron Brogan said signing inconsistent mortgage documents doesn’t constitute a valid cause for removal, explaining that “cause generally means misconduct, neglect of duty, dishonesty, or action that materially impairs performance.” He expects courts will grant Cook a preliminary injunction blocking her removal.
The firing escalates Trump’s months-long war against the Fed, where he has repeatedly demanded interest rate cuts and attacked Chair Jerome Powell as a “numbskull.” Unlike historical presidential Fed disputes, Trump seeks to reshape the entire board with political allies, alarming economists and investors.
In a fiery warning, Alex Obchakevich, a prominent researcher and founder of Obchakevich Research, said the move “undermines the Fed’s independence” and “causes volatility, weakening of the dollar, and threatens its reserve role with recession risk.” The Fed’s autonomy, established since the 1970s, allows it to set monetary policy without political interference.
Evercore ISI strategists Krishna Guha and Marco Casiraghi argue markets haven’t “properly factored in” Trump’s Fed interference impacts, warning the calm reaction may be misguided.
The confrontation tests constitutional boundaries as Trump attempts to exert unprecedented executive control over monetary policy. Legal experts expect prolonged court battles, with Cook likely remaining in position during litigation.
As the legal battle unfolds, investors face uncertainty about U.S. monetary policy credibility and the dollar’s future as the world’s reserve currency, with potential ramifications extending far beyond American borders.
