The US Dollar Index (DXY) is falling, dropping from above 100.00 to close to 99.00. This decline is fueled by increased risk appetite, making the US Dollar the weakest currency among the G7 nations. The decrease in value comes as the US government reopens, sparking a relief rally. The index has hit new two-week lows of 99.15 during this shift.

President Trump Ends Government Shutdown

President Trump has signed a bill to end the longest government shutdown, bringing back funding. Now there is anticipation for US macroeconomic data that was delayed during the 43-day shutdown, but the schedule for its release is still unclear. Market participants are reevaluating expectations for a Federal Reserve interest rate cut in December. There are differing opinions among Fed members about the need for easing, with Stephen Miran supporting lower borrowing costs while Raphael Bostic worries about inflation. Overall market sentiment is less favorable towards a December rate cut, leading futures markets to adjust their predictions. The CME Group’s FedWatch tool shows the chance of a quarter-point cut has dropped to 54%, down from 64% last week and over 90% a month ago. Now, the US Dollar Index is holding steady around 104.50, a sharp contrast to the weakness observed when it tested the 99.00 level in similar market circumstances. Despite improving risk appetite, the dollar is supported by more factors than just simple risk narratives. This situation demands a deeper analysis than previous cycles.

Historical Volatility in the Dollar

We remember early 2019 when the reopening of the government caused a strong, sentiment-based decline in the dollar. At that time, the longest shutdown in history, combined with delayed economic data, created weeks of uncertainty for traders. This historical volatility reminds us how political outcomes can temporarily overshadow fundamental factors. Unlike 2019, when rate cuts were being anticipated, the current market faces a different Federal Reserve. With the latest CPI report showing core inflation stubbornly at 2.8%, the Fed appears focused on maintaining higher rates for a longer period. The CME FedWatch Tool currently shows less than a 15% chance of a rate cut in the next quarter, a significant shift from what we’ve seen in the past. This creates a tug-of-war for the dollar, making straightforward bets risky and options strategies more attractive. A steady unemployment rate of 4.1% adds to the uncertainty, indicating a slowing economy that is at odds with the Fed’s aggressive approach. Traders may want to consider buying volatility through strategies like straddles on major pairs such as EUR/USD to profit from significant price movements in either direction. The current market conditions are also reflected in the CBOE Volatility Index (VIX), which has risen from its lows and is now around 17. This indicates that traders are expecting more uncertainty in the future, especially with important inflation and retail sales data coming next week. This backdrop favors strategies that benefit from volatility over those requiring strong directional trends. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now