The US Dollar Index has dropped as the government shutdown enters its 19th day without a solution. Markets are now seeing a near certainty of rate cuts, with a 100% chance for October and 96% for December, according to the CME FedWatch Tool. The US Dollar is stable around 98.50 but is being affected by the prolonged shutdown and expected Fed rate changes. The index tracks the dollar’s value against six major currencies and has recently lost ground from earlier gains.

Government Funding Lapse

This is the third-longest funding lapse in modern US history. The possibility of more rate cuts from the Federal Reserve adds pressure on the US Dollar. St. Louis Fed President Alberto Musalem indicated he might support a rate cut if job risks increase, advocating for a balanced approach. Improved relations with China could bolster the dollar, as President Trump looks to reduce tariffs based on Chinese actions. The US Dollar is the leading global currency, making up over 88% of foreign exchange transactions. Fed policies, whether easing or tightening, play a crucial role in determining its value, which in turn affects economic stability and job growth. We believe the US Dollar will face major challenges in the coming weeks. The ongoing government shutdown and the expectation of two Fed rate cuts this year create a bearish outlook, suggesting the dollar may weaken against other major currencies.

Currency Options and Volatility

Historically, the 35-day shutdown from late 2018 to early 2019 cost the US economy about $11 billion, highlighting the high stakes of political gridlock. With the current shutdown reaching 19 days, implied volatility for currency options is expected to increase. This makes buying put options on the dollar an appealing, though pricier, strategy for hedging or speculation. The Fed’s dovish outlook is a strong driving force, with an October rate cut widely anticipated. Similar to 2019, when three rate cuts limited the dollar’s strength for several months, traders should keep an eye out for signs of ongoing economic slowdown. Recent data showing a slight rise in jobless claims to 215,000 supports this expectation. The biggest risk for short-dollar positions comes from US-China trade talks. A surprise breakthrough, like the earlier “Phase One” deal, could trigger a risk-on rally and temporarily strengthen the dollar. Traders should closely watch news from upcoming meetings for any developments on agricultural purchases or tariff cuts. Create your live VT Markets account and start trading now.

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