The US dollar fell after a legal ruling regarding Fed Governor Lisa Cook. A federal judge blocked former President Trump’s efforts to remove Cook from her position on the Federal Reserve Board. The judge ordered Chair Powell and the Board of Governors to let her continue in her role during the ongoing legal proceedings. This legal case led to a drop in the USD. The dollar stayed weak, even with rising geopolitical tensions due to Russia’s actions aimed at Poland. Reports showed that Russian drones had entered NATO airspace by crossing into Poland. A US congress member called these actions an act of war, while the Polish military confirmed they were actively responding to the Russian incursion with weapons.

The Federal Reserve Focus

The dollar’s decline related to the Federal Reserve news seems to be the main focus for the market, but we see this as a distraction. The court’s decision to keep Governor Cook suggests a more independent Fed, which may lead traders to rethink their expectations of aggressive rate cuts. Looking at market data from early 2025, Fed funds futures previously predicted a full percentage point of cuts by next year, but this has now been adjusted to 75 basis points in just a few hours. This focus on the Fed is creating a dangerous complacency about the situation in Eastern Europe. A military conflict between Russia and a NATO member like Poland is a serious risk that should prompt a rush of capital into the US dollar as a safe haven. We saw this clearly in February 2022 when the Dollar Index (DXY) rose from 96 to over 103 after the initial Russian invasion of Ukraine. The market’s current muted response indicates a significant mispricing of risk, presenting a clear opportunity. Volatility is unusually low given the serious news from Poland, with the VIX index around 14, a level inconsistent with the risk of major conflict. We should actively buy volatility through VIX calls or futures, as any escalation is likely to cause a sharp increase from these low levels.

European Currency Vulnerabilities

This situation makes European currencies, especially the Euro and the Polish Zloty, seem particularly at risk. The current weakness of the dollar creates an attractive opportunity to buy long positions against these currencies. We believe that taking long USD/PLN positions or purchasing call options on the dollar against the euro is a smart way to prepare for the expected flight to safety, which often follows events like this. Additionally, any conflict involving Russia could quickly threaten global energy supplies and lead to a rush for hard assets. We should expect a significant rise in crude oil and gold prices. Buying call options on both Brent crude futures and gold ETFs allows for upside exposure to the geopolitical risk premium that we believe the wider market is currently overlooking. Create your live VT Markets account and start trading now.

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