UBS analysts warn that trade wars are still a challenge for the US dollar. They believe some of the US’s trade partners may delay agreements with a possible Trump administration, in hopes of getting better deals. These delays could lead to higher tariffs, making the outlook for the dollar more uncertain. UBS also notes that the Federal Reserve has few chances to raise interest rates, which usually strengthens the dollar.

Expected Economic Impact of Tariffs

Upcoming data may show how tariffs impact the economy, leading markets to predict rate cuts, according to UBS. As a result, they anticipate a weaker long-term outlook for the US dollar. UBS has highlighted several factors that could negatively affect the dollar’s future strength. They focus on how protective trade tensions and postponed negotiations from key trade partners, combined with an unstable policy environment in Washington, may cause the dollar to lose value over time. Additionally, the Fed has limited options for raising rates due to slow domestic growth and a predicted decrease in inflation. From our view, this scenario creates a complex situation for asset pricing. The usual link between optimism about interest rates and dollar appreciation has weakened. If traders believe that trade slowdowns will impact future consumer price index (CPI) numbers—or job reports—then expectations for rate cuts may keep adjusting downward.

Trade-Related Slowdowns and Future Rate Probabilities

Currently, there’s a shrinking chance for further dollar strength in the near future. This may lead traders to focus on relative value trades instead of directly investing in USD. Some may start shifting into positions that benefit from lower rate expectations in the US, particularly in EURUSD or AUDUSD, where foreign central banks are close to their low points. As for tariffs, their effect on prices and output may take a few more reports to become clear. However, traders don’t need to wait for that. We’ve seen that option prices for September and October indicate a growing premium on the risk of a weaker dollar, especially evident in the skew between DXY and S&P put options compared to calls. Powell’s comments after the upcoming key data releases will likely receive intense scrutiny. Any hints regarding softening inflation or slowing trade demand could lead to expectations for quicker rate cuts. This period is particularly fragile, as the positioning is uneven. Reports indicate that institutional investments in the dollar haven’t significantly decreased yet. This means that any negative news could trigger a shift in allocations, amplifying the impact in an unexpected way. What’s likely to follow is a time of increased uncertainty. Traders who look at monthly data for insights should focus more on variations within job reports or monthly CPI sub-indexes that show whether tariffs are directly harming consumption or weakening confidence. This uncertainty often favors gamma strategies over simple delta strategies. Appropriately structured strategies close to expiration can capture decent intraday price fluctuations as the dollar reacts to changing rate expectations and risk aversion in global markets. We are closely observing how volatility markets assess potential political outcomes from now until November. The dollar’s next significant move will depend not only on the Fed’s choices but also on how much global players believe the US will stabilize or harden its stance on trade. This perceived direction is already influencing options pricing earlier than in previous cycles. Create your live VT Markets account and start trading now.

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