The US Dollar Index (DXY) is stabilizing around 99.00, thanks to hopes for a trade agreement between the US and China. President Trump expects to make various deals with Chinese President Xi Jinping, possibly including discussions on soybean exports and nuclear arms. At the same time, the Trump administration is thinking about limiting exports to China that rely on US software, ranging from laptops to jet engines. This response is due to China’s restrictions on rare earth exports. Such geopolitical issues can affect currency values and trade ties.

Federal Reserve Rate Expectations

A recent Reuters poll indicates that 115 out of 117 economists expect the Federal Reserve to cut rates by 25 basis points in October. The market predicts a 97% chance of a Fed rate cut, with a 96% likelihood of another cut in December, according to the CME FedWatch Tool. The US Dollar remains crucial in global finance. It became the world’s reserve currency after World War II and is vital for transactions totaling $6.6 trillion daily. The Federal Reserve affects its value through monetary policy, which influences inflation and unemployment. Quantitative easing (QE) usually weakens the dollar, while quantitative tightening (QT) tends to strengthen it. We’ve seen similar situations before, where mixed headlines led to unstable markets. Previously, when the US Dollar Index was around 99, it fluctuated based on rumors of a US-China trade deal one day and threats of export limits the next. This pattern highlighted the dollar’s sensitivity to monetary policy and geopolitical news. As of October 23, 2025, the landscape has changed, but some patterns remain. The US Dollar Index is stronger now, trading around 106.50, boosted by the Federal Reserve’s rate hikes that peaked in 2024. Yet, with September’s CPI data showing core inflation steady at 3.1%, the Fed is keeping rates steady, leading to uncertainty for future decisions. Current market sentiments reflect the past, with expectations for rate cuts almost certain. Although the Fed’s official stance is still hawkish, the CME FedWatch Tool now shows a 75% probability of the first rate cut by March 2026. This difference between the Fed’s communication and market expectations may lead to volatility for the dollar.

Global Supply Chain Realignment

The primary driver is no longer just a trade deal but a wider realignment of global supply chains. There is an ongoing trend to “de-risk” from China, as US companies are investing more in manufacturing in Mexico and Vietnam. Any news that speeds up or complicates this process could prompt sudden moves in the dollar, similar to past meetings between Trump and Xi. For traders in derivatives, this environment makes straightforward bets on the dollar risky. Instead, it might be wiser to pursue strategies that benefit from increased volatility, such as buying straddles or strangles on major currency pairs like EUR/USD. With the VIX index above 18, the market anticipates more fluctuations, allowing options to capture substantial price changes either way. It’s also important to note that the Fed is still engaged in quantitative tightening, as it lets bonds mature from its balance sheet each month. This reduces liquidity and helps support a stronger dollar. This tightening contrasts with the market’s rising expectation for rate cuts, creating an interesting dynamic that could lead to trading opportunities in the upcoming weeks. Create your live VT Markets account and start trading now.

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