The Dollar fell in a choppy session on Tuesday after US President Donald Trump announced he was dismissing Federal Reserve Governor Lisa Cook, a move seen by markets as challenging the Fed’s independence.

The Dollar index dropped by up to 0.4% before bouncing back following Trump’s announcement, which he shared in a letter to Cook posted on social media.

An index tracking the Dollar against six major currencies fell 0.1% to 98.368. The decline followed the US currency’s largest single-day gain of the month on Monday, Reuters reports.

“Markets aren't panicking, but they are recalibrating, earlier rate cuts look more likely after Cook’s removal,” stated 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 US.”

In his letter to Cook, Trump cited alleged misconduct in securing mortgage loans as the reason for her dismissal. Cook responded by asserting that Trump lacks the authority to remove her from the Federal Reserve and confirmed she will not resign.

The unprecedented action represents a major escalation in Trump’s conflict with the Fed, which he criticises for not cutting interest rates faster, heightening investor concerns over the central bank’s independence.

“Trump's move to fire Lisa Cook will cast a pall on Fed independence and could weigh on the Dollar and US Treasuries,” according to Vasu Menon, managing director of investment strategy at OCBC. “However, don't expect major market moves as Trump's action is somewhat unprecedented and may be challenged in US courts.”

Following the announcement, the yield on the two-year US Treasury fell 1.3 basis points to 3.717%, while the 30-year bond yield climbed 4.7 basis points to 4.936%. The spread between two- and 10-year Treasuries reached a one-month high of 58.7 basis points.

Traders are currently pricing in an 83.3% chance of a rate cut at the Fed’s September meeting, largely unchanged from last week, according to CME Group’s FedWatch tool.

At the time of writing, the Dollar was last trading at 147.845 Yen, roughly matching late US levels.

Meanwhile, the Euro gained 0.1% in Asian trading to $1.1629, recovering some losses after France’s main opposition parties indicated they would not support a confidence vote on Prime Minister François Bayrou’s proposed budget cuts, raising concerns about potential political instability.

The offshore Yuan rose nearly 0.1% to 7.1547 per Dollar, approaching a one-month high as Chinese stocks rallied.

Elsewhere, the Australian Dollar dipped 0.1% to $0.6479 after the Reserve Bank of Australia’s August meeting minutes indicated that further policy easing may be needed over the next year. The New Zealand Dollar fell 0.2% to $0.5839.

Sterling traded at $1.3453, erasing early gains made following news of Trump’s action against the Fed.