The US Dollar has dropped for three days in a row, partly due to upcoming US/China trade talks and the ongoing government shutdown. The New Zealand Dollar and British Pound are up, while the Japanese Yen has lost some value. Global stock markets are generally rising, and US equity futures are positive. In the bond market, core bonds remain stable or have slightly increased, although French government bonds are lagging behind. Gold prices have hit new highs, increasing nearly 6% this week, despite a brief decline in Asian trading. Crude oil prices are slightly up due to US urging Asian countries to steer clear of Russian oil. If no new US data is released, the Dollar might keep falling. The Federal Reserve’s Beige Book showed a stable economy, but noted tariffs are pushing inflation higher. Swap markets indicate a strong likelihood of a 25 basis point rate cut by the FOMC later this month, with another cut expected in December.

Federal Reserve and Dollar Expectations

Expectations of easier monetary policy from the Federal Reserve may limit gains for the Dollar. The ongoing government shutdown is causing delays in important economic data releases. Central bank speeches from the Federal Reserve, Bank of England, and European Central Bank are anticipated today. The Dollar Index is suggesting a potential decline towards the 97.80/00 level. The US Dollar is consistently weak, with the Dollar Index (DXY) around 98.10 after breaking through a key support level. This weakness is mainly due to the market’s strong belief that the Federal Reserve will start cutting interest rates. The technical outlook indicates a likely further drop towards the 97.80 level in the coming weeks. We think the expectation of easier monetary policy is justified. Fed funds futures are predicting over a 95% chance of a 25-basis-point rate cut at the FOMC meeting later this month, following dovish signals from the central bank in September 2025. The market also widely anticipates a second rate cut in December.

Economic Context and Market Strategies

The Fed is in a tough spot, as the latest Consumer Price Index (CPI) report for September shows inflation is still high at 3.8% year-over-year. The Fed appears to prioritize concerns about a slowing economy over its inflation goals. This combination of slow growth and high inflation is a challenge for the Dollar. For derivative traders, this situation favors strategies that benefit from a continued decline in the Dollar and rising uncertainty. Buying put options on dollar-tracking ETFs could be a smart move as the DXY is expected to fall. The ongoing US government shutdown worsens the Dollar’s situation by delaying key economic data. Gold has significantly benefited, reaching a new cycle high of about $2,450 per ounce, a considerable increase from its 2024 levels. A weaker Dollar and lower real interest rates make gold more appealing. We foresee potential for further gains, and buying call options on gold miners or gold ETFs might capitalize on this trend. Market volatility is also rising, with the VIX increasing from about 14 to 18.5 in just a month. This rise reflects growing investor anxiety over US political tensions and unresolved trade issues with China. Purchasing protective puts on equity indices or considering long volatility positions may be prudent hedges. In major currency pairs, the British Pound has performed well, with GBP/USD now testing the 1.2800 resistance level. Conversely, even though the Japanese Yen is slightly softer today, we expect the narrowing interest rate gap between the US and Japan to push USD/JPY lower from its current 151.50 position, possibly moving towards 148.00 as US yields decrease. Create your live VT Markets account and start trading now.

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