SINGAPORE: Currency markets have turned turbulent since U.S. President Donald Trump announced he was removing Federal Reserve Governor Lisa Cook, a move seen as escalating his confrontation with the central bank and rattling confidence in its independence.

The dollar index dropped this week. The dip has come after the greenback logged its most substantial daily gain of the month on August 25.

Trump posted a letter on social media accusing Cook of improprieties related to mortgage loans as justification for her dismissal. Cook swiftly rejected the claim, saying the president has no authority to remove her and that she would not resign.

Markets quickly weighed the implications. "Markets aren't panicking, but they are recalibrating; earlier rate cuts look more likely after Cook's removal," said Charu Chanana, chief investment strategist at Saxo in Singapore. "But this isn't just about rate cuts, it's about Fed independence and the growing institutional risks in the U.S."

The rare attempt to fire a sitting Fed governor marks a new stage in Trump's campaign against the central bank, which he has criticized for not cutting interest rates more aggressively. Investors worry the clash could erode the Fed's credibility. "Trump's move to fire Lisa Cook will cast a pall on Fed independence and could weigh on the dollar and U.S. Treasuries," said Vasu Menon of OCBC. He added that markets may temper their reaction, as the action is now facing legal challenges.

Bond yields reflected the uncertainty. The two-year Treasury yield fell this week while the 30-year yield has climbed. The gap between two- and 10-year bonds widened to its highest in a month. According to CME's FedWatch tool, traders still price an 83 percent chance of a September Fed rate cut.