(Bloomberg) — The dollar pared most of its losses as Federal Reserve Governor Lisa Cook said she won’t resign after President Donald Trump moved to oust her.
A gauge of the dollar retreated as much as 0.3% and gold rose as much as 0.6% after Trump posted on his Truth Social account that Cook will be removed effective immediately. The greenback then cut some of the losses and gold trimmed gains after Cook said she won’t resign. Asian stocks fell 0.7% and equity-index futures for US and Europe retreated.
The Treasury curve steepened, with a drop in two-year yields reflecting growing speculation of a Fed interest-rate cut as soon as next month, while 30-year yields climbed on concern looser monetary policy would risk fueling inflation. French bond futures opened lower in Asia trading.
Trump’s move adds to the negative sentiment toward US assets, after his tariff war and widening deficit revived a “Sell America” theme earlier this year and Wall Street questioned US exceptionalism. Traders have been seeking alternatives to the dollar, the world’s reserve currency, and Treasuries, and any perception of eroding Fed independence could accelerate that shift.
“Removing Cook increases concerns over Fed independence, assuming Cook has no legal recourse,” said Rodrigo Catril, a strategist in Sydney at the National Australia Bank. “If Trump succeeds, then this means he could potentially have four board members aligning with his view. Whether these board members respect Fed independence and adhere to the Fed’s dual mandate remains to be seen.”
Trump’s announcement came after the US Department of Justice indicated it planned to investigate Cook, following a criminal referral from Federal Housing Finance Agency Director Bill Pulte alleging that she may have committed mortgage fraud.
That investigation marked the latest in a series of moves by the Trump administration both to increase legal scrutiny of Democratic figures and put pressure on the central bank.
Cook said Trump has no authority to fire her, and she won’t quit. Cook’s lawyer, Abbe Lowell, said they plan to take “whatever actions are needed to prevent” Trump’s “illegal action.”
Cook is likely to sue to challenge the removal and “we believe she can win,” wrote Bloomberg Intelligence analyst Elliott Z Stein. Mere allegations of fraud are likely insufficient to meet the “for cause” removal standard unless actual wrongdoing is established, which at minimum likely requires an investigation and possibly a conviction, he wrote.
“Markets typically take such headlines as a threat to Fed independence,” said Anna Wu, an investment strategist at Van Eck Associates. “It sparks uncertainty but also reinforces that the Trump playbook is likely to dominate.”
What Bloomberg strategists say:
“Risk sentiment will falter further thanks to a barrage of Trump headlines hitting markets that were already shaky. Now, the Fed’s credibility is under the spotlight after Trump sought to remove Lisa Cook. That move signals a wider shakeup may be possible if policymakers fall out of step with the White House. The long end and the US dollar will suffer as Fed independence — long seen as sacrosanct — comes under increasing strain.”
— Mary Nicola, MLIV.
Risk to the independence of the Fed was also flagged as a concern by S&P Global Ratings earlier this month while affirming the AA+ rating for the US — a score it’s given since 2011, when it first downgraded the world’s largest economy from AAA.
“The ratings could also come under pressure if political developments weigh on the strength of American institutions and the effectiveness of long-term policymaking or independence of the Federal Reserve,” analysts including Lisa Schineller wrote in a report. “This, in turn, could jeopardize the dollar’s status as the world’s leading reserve currency — a key credit strength.”
Meanwhile, contracts for the Nasdaq 100 fell 0.2% as Trump also threatened to place export curbs on chips.
Stocks were already under pressure after initial optimism about the Fed lowering interest rates vanished and US stocks retreated Monday. Stocks rallied on Friday after Federal Reserve Chair Jerome Powell opened the door for a possible interest-rate cut.
The sense of euphoria eased as doubts over the pace of those reductions lingered on Wall Street as traders braced for a not-so-friendly price reading later this week.
Policymakers are grappling with inflation that’s still above their 2% goal — and rising — and a labor market that’s showing signs of weakness. That unnerving reality, which pulls policy in opposite directions, is made worse by a high degree of uncertainty about how each of those factors will evolve over the coming months.
The Fed’s preferred gauge of underlying inflation probably ticked higher last month, with the personal consumption expenditures price index excluding food and energy rising 2.9% from a year ago. That would be the fastest annual pace in five months.
Elsewhere, French bond futures opened lower after Prime Minister Francois Bayrou called a confidence vote that may topple France’s government as soon as next month.
Aside from the macro picture, the next big test for the stock market will be a read on what’s been driving gains for the past few years: artificial-intelligence euphoria.
Nvidia Corp. is due to unveil its results Wednesday after the close. The company’s size — it has the biggest weighting in the S&P 500 at almost 8% — and its position at the center of AI development have made it a bellwether for the broader market.
S&P 500 futures fell 0.1% as of 1:31 p.m. Tokyo time Japan’s Topix fell 0.9% Australia’s S&P/ASX 200 fell 0.6% Hong Kong’s Hang Seng fell 0.2% The Shanghai Composite rose 0.1% Euro Stoxx 50 futures fell 0.5% Currencies
The Bloomberg Dollar Spot Index was little changed The euro was little changed at $1.1628 The Japanese yen was little changed at 147.78 per dollar The offshore yuan was little changed at 7.1551 per dollar Cryptocurrencies
Bitcoin rose 0.6% to $110,220.86 Ether rose 1.8% to $4,432.49 Bonds
The yield on 10-year Treasuries advanced three basis points to 4.30% Japan’s 10-year yield was little changed at 1.620% Australia’s 10-year yield advanced three basis points to 4.32% Commodities
West Texas Intermediate crude fell 0.5% to $64.47 a barrel Spot gold rose 0.3% to $3,376.06 an ounce This story was produced with the assistance of Bloomberg Automation.
