The US Dollar Index (DXY) saw slight losses, trading around 98.60 during the Asian session on Tuesday. There are worries about the ongoing US government shutdown, now 21 days in, which could impact economic activity and the performance of the USD. Traders are also looking forward to the release of US September CPI inflation data on Friday. Analysts expect both the headline and core CPI to rise by 3.1% compared to last year. If the inflation data exceeds expectations, it could strengthen the US Dollar.

Fed Officials Openness

Fed officials like Christopher Waller and Alberto Musalem are open to interest rate cuts if economic risks continue. Stephen Miran supports more aggressive cuts at future meetings. These dovish comments may put short-term pressure on the USD. However, the DXY’s drop might be limited as US-China trade tensions slightly ease, though the overall market remains uncertain. The US Dollar is the official currency of the United States and widely used in many countries, making up over 88% of global foreign exchange turnover. The Federal Reserve’s policies, especially interest rate changes, greatly affect the value of the USD. Quantitative easing can weaken the dollar by increasing credit flow, while quantitative tightening usually strengthens it. In the past, the dollar’s weakness around the 98.50 level was part of a different monetary landscape. Now, the DXY is holding stronger at around 104.50. Market dynamics are shaped by the aggressive rate hikes that started in 2022, not by the dovish outlook from past Fed officials. Looking back at previous anxieties, like the 35-day government shutdown in late 2018 and early 2019, they seem relatively minor now. Our main concern today is persistent inflation, which, according to recent data from September 2025, remains at 3.3%—well above the Fed’s target. This ongoing price pressure indicates that traders should prepare for market volatility, possibly using options to hedge against sharp moves in the dollar after upcoming economic reports.

Federal Funds Rate and Fed’s Communication

Calls for rate cuts in the past contrast sharply with our current situation. After reaching 5.50% in 2023, the Federal Funds Rate has only been slightly lowered to 4.75%. The Fed’s communication still suggests that rates will stay “higher for longer.” Therefore, derivative traders should be cautious about betting on substantial rate cuts and might want strategies that work well in a stable or slowly declining short-term interest rate environment. While US-China trade tensions are still relevant, the focus has shifted from tariffs to strategic competition in technology and investment. The old fears of a trade war have given way to a more complex situation that affects specific sectors rather than the overall market. This environment requires more nuanced trading strategies, such as using derivatives to exploit differences between the dollar and currencies affected by Chinese economic policies. Create your live VT Markets account and start trading now.

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