The US Dollar (USD) keeps rising, approaching the high end of its range from June. This is happening despite a lack of new data due to the US government shutdown. The rise is mainly influenced by events outside the US, such as political issues in France and Japan, rather than strong US economic indicators. As a result, the USD might fall if global conditions improve. Minutes from the Federal Open Market Committee (FOMC) meeting on September 17-18 reveal potential plans for easing monetary policy. Some members shared worries about the labor market, but others believe the federal funds rate might stay the same. The FOMC forecasts two more rate cuts of 25 basis points by the end of the year, which matches current market expectations.

Concerns at the Federal Reserve

There are worries that the Federal Reserve may choose a more relaxed approach by the December FOMC meeting due to the effects of tight monetary policies. Fed Chair Jay Powell will give a pre-recorded speech today without a Q&A session. The GBP/USD and EUR/USD are falling, influenced by the strong USD and global uncertainties. Gold and cryptocurrencies like Bitcoin and Ethereum are experiencing mixed outcomes, with gold showing potential for growth, supported by the expected rate cuts. We believe the current strength of the US Dollar is weak, largely driven by political instability in France and Japan rather than a solid US economy. The ongoing government shutdown, now over a week old—similar to the start of the 16-day shutdown in 2013—leaves us without crucial economic data. This suggests that the dollar could quickly decline once global risks settle. The Federal Reserve is likely to cut rates at least twice more before the year ends, which could weaken the dollar in the long run. The last jobs report for August showed only 95,000 new jobs, highlighting concerns about the labor market. With core inflation at just 2.1%, this opens the door for further easing. The absence of official data creates considerable uncertainty, presenting a trading opportunity. The VIX has been above 22, signaling ongoing market anxiety that can be used with volatility strategies like straddles. Expect higher option premiums for major currency pairs and indices, especially those expiring after the December 9-10 FOMC meeting.

Long Term Outlook for the Dollar

Looking ahead, betting on dollar weakness seems wise once the shutdown ends. Consider using put options on the dollar index or call options on Gold expiring in December or January to take advantage of anticipated declines driven by the Fed. Gold’s strength near $4,000 reflects expectations for lower US interest rates. However, in the short term, opposing the dollar’s upward momentum is risky while external challenges remain. The political climate in France is still uncertain, providing temporary safe-haven support for the dollar. Any short positions on the dollar should be managed carefully with tight stops until the government reopens and data flow resumes. Create your live VT Markets account and start trading now.

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