The US Dollar Index (DXY) has fallen to about 98.75 during Thursday’s Asian trading hours. This drop is due to the ongoing US government shutdown, which is now in its ninth day. The Senate’s failure to agree on funding continues to dampen market sentiment, likely causing the US Dollar to weaken against other currencies.

Federal Reserve and Market Reactions

After the Federal Open Market Committee released its minutes, it seems more rate cuts could be on the way this year. Most policymakers backed the rate cut in September, with a 78% chance of another 25 basis point cut in December. Additionally, the weekly US jobless claims data is postponed, and Federal Reserve Chair Jerome Powell is scheduled to speak later today. His comments could influence the performance of the DXY. The US Dollar is the leading global currency, accounting for 88% of international foreign exchange trades according to 2022 data. Decisions by the Federal Reserve heavily influence the USD. Strategies like quantitative easing usually weaken the dollar unless balanced by actions like quantitative tightening. Despite these policy changes, the US Dollar remains vital in global finance and trade. We recall when fears of a government shutdown and the prospect of rate cuts brought the Dollar Index below 99. Now, in October 2025, the situation has changed drastically with the Fed focused on tightening. The DXY is currently much stronger, hovering near 106.50, as global investors seek the safety and yield of the dollar. A key factor driving this shift has been persistent inflation, which, based on the latest September data, remains at 3.5% year-over-year. This has compelled the Federal Reserve to adopt a hawkish approach, raising the federal funds rate to a high of 5.75%. This marks a sharp contrast from the earlier rate-cutting environment when the Fed was leaning towards easing.

Market Volatility and Future Economic Indicators

Given this situation, we can expect increased volatility in USD-related pairs, especially since unemployment has slowly risen to 4.2%. Options strategies, such as buying straddles on major currency pairs, may be beneficial for capitalizing on potential sharp movements as the market reacts to the Fed’s dual mandate. Implied volatility in the options market has already surged by 15% in the past month, indicating rising investor anxiety. Our immediate attention should be on the upcoming Consumer Price Index (CPI) report and the next FOMC meeting in November. The CME FedWatch Tool currently shows a 60% chance of one final rate hike, but any weakness in incoming data could quickly change this outlook. We should also keep an eye on renewed budget negotiations in Congress, as past government shutdowns remind us how quickly political gridlock can shake up the markets and affect the dollar. Create your live VT Markets account and start trading now.

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