When I read the news about the dismissal of Fed Governor Lisa Cook on a newsflash during my vacation, I was certain the markets would go crazy. To my surprise, however, I now have to acknowledge that EUR/USD is trading nearly unchanged compared to levels from three weeks ago. Even in the options market, I can’t detect any heightened nervousness. Hedging against a USD crash relative to the euro has even become cheaper! And after reading some market commentaries, I can see I’m not the only one surprised by this level of calm, Commerzbank’s Head of FX and Commodity Research Thu Lan Nguyen notes.
USD investors can indeed breathe a sigh of relief
“It should be indisputable what a catastrophic signal this unprecedented attack by a U.S. president on the independence of the Federal Reserve sends to USD exchange rates. Absolutely everyone must understand that the accusations against Cook are a clear warning signal to the other FOMC members to bow to government pressure. Some argue that Cook’s dismissal does not change the short-term U.S. interest rate outlook. But that’s not what’s relevant for the dollar. What is decisive is the assumption that the Fed’s reaction function will be significantly more dovish in the long term. In other words, the central bank is likely to respond less actively to inflation risks in the future than it has done so far. For those already uncomfortable with the attacks and outbursts against the Fed Chair and his colleagues now, just imagine what the situation would look like if inflation rises and the central bank signals the need for rate hikes.”
“So why isn’t the dollar trading significantly weaker? I strongly suspect the explanation lies in the unshakable belief in the “checks and balances” of U.S. democracy. The power of the state does not rest solely in the hands of the U.S. president. We saw a demonstration of this principle over the weekend: A U.S. appeals court declared parts of the tariffs introduced under President Trump to be illegal. The case may now move to the Supreme Court. This brings the removal of reciprocal tariffs one step closer. The same applies to the Cook case: The governor has already filed a lawsuit contesting her dismissal. And when you read the opinions of experts, it indeed seems questionable whether the grounds for her dismissal are legally valid. Here too, Trump faces the threat of a defeat.”
“If it truly turns out that the separation of powers in the U.S. holds firm and the judiciary thwarts Trump’s attack on the Fed, USD investors can indeed breathe a sigh of relief. However, the courts’ final ruling is still pending. Furthermore, it must be assumed that Trump would also accept such a ruling if it goes against him. The latter, as should be clear, is by no means guaranteed.”
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Blythe Pecora