Trump's dismissal of The Federal Reserve Board of Governors raises concerns about policy independence, while the US stock market rises against the trend and Bitcoin shows more resilience than the US dollar.

Despite Trump's sudden dismissal of Federal Reserve Board of Governors member Lisa Cook, which raised serious doubts about the independence of the Central Bank, U.S. stocks rose against the trend on Tuesday, with the S&P 500 up 0.41%. The VIX short positions climbed to their highest level since September 2022. Long-term U.S. Treasury yields have risen, and the dollar index fell by 0.2%, as funds shifted towards gold and Bitcoin to hedge against political risks. This article analyzes the event in comparison to the Nixon era, the hidden market dangers under suppressed volatility, and Bitcoin's performance in resisting declines amidst political uncertainty.

[The U.S. stock market ignores political turmoil, and the market remains optimistic ahead of NVDA's earnings report]

On Tuesday, U.S. stocks opened lower but rose throughout the day, closing higher across the board. The S&P 500 index increased by 0.41%, closing at 6465.94 points; the Nasdaq Composite index rose by 0.44%, closing at 21544.27; the Dow Jones Industrial Average climbed by 135.60 points to 45418.07. Market attention was focused on the upcoming earnings report from NVIDIA, temporarily overshadowing concerns about the conflict between Trump and the Fed.

[Trump fires Cook, bond and exchange rate markets react violently]

Trump announced the dismissal of Fed Governor Lisa Cook on the grounds of "unsubstantiated mortgage applications," but Cook publicly responded by stating that "the president has no authority to replace Fed governors." The White House refused to back down and insisted on its personnel decision. This move triggered a significant fluctuation in the bond market:

1. Long-term U.S. Treasury yields surged while short-term yields fell, steepening the yield curve.

2. The US Dollar Index fell by 0.2%, with a cumulative decline of nearly 10% in 2025. Traders interpret this as the market's response to the politicization of the Fed – interest rates may decrease in the short term, but long-term inflation risks are pushing up long-term rates.

[VIX short positions hit a nearly three-year high, volatility suppression hides significant risks]

Despite rising political uncertainties, hedge funds have significantly increased their short positions on the VIX. As of August 19, the net short contracts for VIX futures reached 92,786, the highest level since September 2022. Similar situations occurred in February this year and July 2024, both of which triggered significant market fluctuations due to events such as the escalation of trade wars and the collapse of yen arbitrage.

Currently, the VIX is still below 15, which is 24% lower than the one-year average, mainly influenced by Powell's supportive comments on a rate cut in September. However, the positions are overly concentrated, and any expected reversal could amplify market shocks.

[Historical Warning: Highly Similar to Nixon's Intervention in the Fed's Era]

Craig Chan, head of foreign exchange strategy at Nomura Securities, pointed out that Trump's actions remind one of Nixon's pressure on Fed Chairman Burns to implement loose policies before the 1972 election. Although floating exchange rates are currently in place and there are new variables such as cryptocurrencies, the pattern of political interference in the Central Bank's behavior is strikingly similar.

The consequences of the Nixon era were extremely serious: the dollar index rose by 0.5% after the 1972 election, but plummeted by 18% within seven months; the Dow Jones increased by 6% at the beginning of 1973, but dropped by 19% over the year, and the yield on ten-year U.S. Treasuries skyrocketed by 130 basis points in just nine months. Chan warned that while the economic structures are different, a loss of Fed independence could trigger a long-term weakening of the dollar and market turmoil.

Bitcoin shows relative resilience, becoming a choice for some funds to hedge.

In this turmoil, Bitcoin has demonstrated stronger stability than traditional currencies. Despite the rise of US stocks and pressure on the dollar, Bitcoin has not seen significant sell-offs; instead, it has attracted some safe-haven funds amid political uncertainty and a weakening dollar, with its performance approaching that of gold and clearly outperforming the dollar. This aligns with the trend since 2025, where the market has gradually viewed Bitcoin as a hedge against political risk and inflation assets.

[Conclusion]

The event of Trump dismissing a member of the Federal Reserve Board of Governors did not immediately lead to a decline in U.S. stocks, but it has triggered a chain reaction in the bond market, currency market, and volatility market. VIX short positions are at extreme levels, and historical experience suggests that the dollar and the stock market may face significant adjustments later on, as the market underestimates the long-term risks posed by a politicized Central Bank. In this context, Bitcoin demonstrates resilience against policy uncertainty and may continue to serve as a tool for some investors to hedge against a weak dollar and political risk. It is advisable to closely monitor personnel changes at the Federal Reserve, VIX position changes, and the flow of funds into Bitcoin to guard against potential cross-market shocks caused by a sudden increase in volatility.