The US Dollar has gained strength this week, as concerns about US credit markets are no longer impacting foreign exchange. FX analyst Francesco Pesole notes that a significant drop in gold prices may have helped support the dollar. Pesole cautions that for the dollar to continue rising, markets need to reevaluate the expected three Federal Reserve rate cuts by March. An unexpectedly high Consumer Price Index (CPI) figure could shift market dynamics, but this outcome is not anticipated.

US-China Tensions

Tensions between the US and China could also affect the dollar’s stability. A meeting originally planned between Trump and China’s President Xi is now uncertain, which might impact market sentiment. While not having a meeting doesn’t automatically lead to higher tariffs, it can still influence risk sentiment and the dollar’s value. The strength of the US Dollar may be running out of steam, as the Dollar Index (DXY) struggles to move past the 106.50 resistance level. After a strong performance this quarter, sustaining further gains for the greenback will be challenging. Signs are emerging that the market may be nearing its peak. This situation is closely linked to changing expectations for the Federal Reserve. The September CPI report showed core inflation cooling to 3.5%. Consequently, the market now sees almost no chance of another rate hike before the end of the year, which reduces the dollar’s attractiveness. This shift is a stark contrast to the bullish outlook we observed earlier in the year. We are witnessing a scenario similar to the volatility during the late 2010s trade negotiations between the Trump administration and China. Back then, simple comments or news of a canceled meeting could create significant uncertainty in the currency markets. A similar pattern might be emerging now.

US-China Relations

Now, attention is turning back to US-China relations, particularly concerning ongoing debates in Washington over potential new tariffs on Chinese electric vehicles. A negative shift in these discussions could harm risk sentiment and increase vulnerability in the dollar. For derivative traders, this means that holding long positions on the dollar carries notable risks in the coming weeks. It may be wise to consider strategies that could profit from limited gains or potential declines. For instance, selling out-of-the-money call options or buying protective puts on dollar-denominated pairs might be a smart way to hedge against dollar strength without excessive risk. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now