The US Dollar continued to rise after the Trump-Xi summit and the Federal Open Market Committee meeting. Frances Cheung and Christopher Wong from OCBC noted market speculation about month-end demand for USD. At the Trump-Xi summit, both nations agreed on a one-year trade truce. China will buy 12 million tons of soybeans this year and 25 million tons by 2026. They will also delay export restrictions on rare earth materials for a year. The US will lower the fentanyl tariff to 10%. Additionally, TikTok’s transaction will restart, and no new port fees will be added for another year.

The Rise and Impact of USD

The USD gained value against various currencies, with the USD/CNY fix set at 7.0880. The rise in USD/JPY, following disappointment from the Bank of Japan, also helped boost the dollar. The USD/AXJ’s future performance may depend on specific factors until a clearer trend is visible. Analysts believe the USD may trend slightly lower but note that without major US data or commitments from Fed Chair Powell, some adjustments might happen. Improved US-China relations and the Fed’s easing cycle could benefit the RMB and risk-sensitive currencies like the AUD, potentially leading the USD to trade lower unless there are unexpected changes in equity sentiment. The US dollar has strengthened due to the positive outcome from the Trump-Xi summit, agreeing on a one-year trade truce. This appears to be a classic scenario of “buy the rumor, sell the fact,” combined with typical month-end dollar demand. The market is currently processing this news, including China resuming major soybean purchases and postponing rare earth restrictions. The decrease in trade tensions has led to a significant drop in implied volatility across different markets. The CBOE Volatility Index (VIX) has fallen below 14 for the first time in months, making options premiums much cheaper. This creates a favorable environment for traders looking to establish new positions with manageable risk in the coming weeks.

Opportunities in a Low Volatility Environment

With a Federal Reserve moving towards easing and calmer US-China relations, the recent dollar strength could present a selling opportunity. China’s agreement to buy 12 million tons of soybeans this year should stabilize agricultural commodity prices, which were heavily affected by trade disputes from 2018-2020. Traders might consider buying call options on soybean futures to benefit from this increased demand. Risk-sensitive currencies, like the Australian dollar, are expected to perform well against the US dollar. Historical data from early 2025 shows that the AUD/USD pair had a strong positive correlation with improved trade sentiment. With the Reserve Bank of Australia keeping rates steady, any hints of US dollar weakness could amplify in pairs like AUD/USD. Therefore, traders should use the current strength of the dollar as a good entry point to prepare for its potential decline. This might involve buying put options on dollar-tracking ETFs or purchasing call options on currencies such as the Australian dollar. The current low-volatility environment makes these strategies relatively inexpensive to implement in the upcoming weeks. Create your live VT Markets account and start trading now.

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