The US Dollar Index (DXY) has dropped to about 98.70 during the early Asian session on Tuesday. This decrease comes as the Federal Reserve is likely to lower interest rates by 25 basis points on Wednesday, bringing the benchmark rate down to 3.75-4.00%. Investors are almost certain—about 97%—that this rate cut will happen, according to the CME FedWatch tool. Policymakers are discussing rate changes while the US government is facing a shutdown. They are also considering a slow labor market and inflation rates above the Fed’s 2% target.

US-China Trade Talks

The US Treasury Secretary has announced a preliminary agreement on critical issues between the US and China. A final deal may be reached during Trump’s meeting with Xi Jinping in South Korea, which could boost the US Dollar. The US Dollar (USD) is vital worldwide, making up over 88% of foreign exchange trading, influenced by the Fed’s policies like rate changes and quantitative easing. Quantitative easing, used during the 2008 financial crisis, usually weakens the Dollar, while tightening can strengthen it. These policies are key to the USD’s value globally. Today’s market is very different from when the US Dollar Index was below 99. As of October 28, 2025, the DXY is stable around 106.50, showing a significantly higher interest rate compared to earlier times. This illustrates how central bank policies have greatly evolved. The Federal Reserve now faces new challenges, with the benchmark rate at 4.50-4.75% and a decision expected next week. Recent data reveals that the core CPI for September 2025 remains at 3.1%, while unemployment has increased to 4.2%. This conflicting information makes the Fed’s next actions hard to predict, unlike the certainty of past rate cuts.

Market Volatility and Trading Strategies

Traders are anticipating significant volatility ahead of next week’s Fed announcement, leading to the Cboe Volatility Index (VIX) rising above 18 this month. Unlike previous times when there was a 97% chance of a rate change, current trading suggests an equal split—50/50—between holding rates steady or raising them by another 25 basis points. This uncertainty provides chances for those betting on price swings. For traders unsure of the Fed’s move, strategies like straddles or strangles on currency ETFs like UUP could be wise to capitalize on large price changes in either direction. If the Fed signals an end to its rate hikes, buying DXY puts might be a smart choice for profiting from a potential dollar drop. On the other hand, call options would be the strategy if inflation data surprises the Fed into raising rates again. Apart from the Fed’s decisions, we are also tracking ongoing trade talks with the European Union about digital services taxes, which could add volatility. A favorable outcome may boost risk sentiment and diminish the dollar’s value as a safe-haven asset. However, if the talks fall through, the dollar could strengthen, presenting another factor for traders to consider. Recent CFTC data shows that large speculators have slightly decreased their net-long positions on the US dollar. This indicates that while many still prefer the dollar, confidence is decreasing ahead of the Fed’s important decision. Derivative traders should watch this trend closely for signs of a bigger shift in sentiment in the weeks ahead. Create your live VT Markets account and start trading now.

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