US President Donald Trump is pushing for a tariff between 15% and 20% in negotiations with the European Union. He wants to see how much the EU can handle in negotiations. Trump is not moved by the EU’s suggestion to lower car tariffs and wants to keep the 25% tax on vehicles. The US Dollar, the official currency of the United States, is the most traded currency in the world, making up over 88% of all foreign exchange transactions. After World War II, it became the leading reserve currency, taking over from the British Pound.

Impact Of Federal Reserve On The US Dollar

The Federal Reserve has a major influence on the US Dollar through its monetary policy, especially when it changes interest rates. If inflation goes above the Fed’s target of 2%, it raises rates, which strengthens the Dollar. Conversely, lower rates during times of high unemployment usually weaken it. Quantitative Easing (QE) is when the Federal Reserve increases the money supply by purchasing US government bonds, typically causing the Dollar to weaken. On the other hand, Quantitative Tightening (QT) stops these bond purchases, resulting in a stronger Dollar. This information carries risks and uncertainties. It is important to do thorough research, as this content should not be seen as a recommendation for investment. Each investor is responsible for their own investment outcomes, including any losses. Trump’s tariff demand on the European Union brings uncertainty to the market. We believe this is a tactic to test resolve and will likely lead to increased volatility across various assets. Traders should brace for sharp price swings driven by news in the coming weeks. This will likely affect the EUR/USD currency pair, which is already sensitive to differing policies. Recently, this pair has had trouble holding vital technical levels, indicating underlying strength in the Dollar amid global uncertainties. A new trade conflict could further pressure the euro as investors flock to the safety of the Dollar.

Federal Reserve’s Monetary Policy Stance

Adding to the situation is the Federal Reserve’s careful monetary policy, which relies on data. Although inflation has cooled, the latest Consumer Price Index (CPI) shows stubbornness in some areas, supporting the Fed’s “higher-for-longer” interest rates approach. This differs from rising expectations for rate cuts from the European Central Bank, creating a favorable situation for the Dollar. This policy has strengthened the US Dollar, with the Dollar Index (DXY) nearing multi-month highs. The Fed’s commitment to its 2% inflation goal is a key factor in the Dollar’s strength. Thus, any rise in trade tensions could boost this trend. Given these mixed pressures, we think traders should focus less on choosing a direction and more on trading the anticipated increase in volatility. Derivative strategies, such as long straddles or strangles on currency ETFs, can allow for profit from significant price movements, whether up or down. This method offers protection against the unpredictability of political negotiations. A similar situation occurred during the trade disputes with China in 2018-2019. During that time, the CBOE Volatility Index (VIX) repeatedly spiked above 20 in response to tariff announcements, showing a major rise from its usual level. These past experiences indicate that betting on volatility is a smart strategy in the current environment. It’s also important to consider the ongoing effects of Quantitative Tightening. The Fed is actively reducing its balance sheet by letting bonds mature without replacing them, thereby decreasing liquidity in the financial system. This tightening effect supports a stronger Dollar, independent of daily news. Create your live VT Markets account and start trading now.

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