The US Dollar Index (DXY) is having a tough time getting back to the 99.00 level, finding some support around 98.80. Concerns about a trade war between the US and China are limiting any increases in the US Dollar. On Friday, Donald Trump threatened to impose 100% tariffs on China, causing market volatility. On Monday, the Index struggled to hold above 99.00, with other currencies also experiencing ups and downs.

Chinese Response

In reaction to Trump’s tariff threat, Chinese officials said they might take countermeasures if needed. At the same time, the US government shutdown has entered its third week without a clear solution. In Europe, political instability in France and Japan is creating risk aversion, preventing the US Dollar from dropping significantly. President Macron is having difficulty forming a new government, and Japan’s Komeito Party has left the ruling coalition, worsening the political crisis there. A trade war usually leads to rising tariffs and trade barriers, increasing import costs. The US-China trade war, which started in 2018, saw multiple tariffs from both sides. With Trump back as US President, these tensions have flared up again, and new tariffs could disrupt global supply chains and raise inflation. With the US Dollar Index stuck around the 99.00 mark, we’re seeing a standoff between opposing forces. Trade war worries and a likely Federal Reserve rate cut are putting pressure on the dollar. However, political turmoil in France and Japan is making the dollar more appealing as a safe-haven currency.

Market Uncertainty

Market uncertainty is high. The CBOE Volatility Index (VIX) recently spiked above 20, signaling significant investor anxiety. As a result, implied volatility for one-month options on major pairs like EUR/USD and USD/JPY has risen to multi-month highs. This situation makes using options for hedging more critical and also more expensive over the coming weeks. Everybody is watching the Federal Reserve closely. The CME FedWatch Tool shows that markets currently expect an 89% chance of a 25-basis-point rate cut at the meeting on October 29. Federal Reserve Chairman Jerome Powell’s speech this Thursday is crucial. It could confirm these expectations or lead to a major market reshuffle. Until then, the dollar is likely to react strongly to any new economic data. The unpredictable price movement in the DXY reflects contrasting trends in its component currencies. While the dollar is weak against the Swiss Franc, instability in the Eurozone and Japan is preventing the dollar from falling further. The political crises in these areas are weakening the Euro and the Yen independently, which is supporting the index. Looking back at the 2018-2019 period, the dollar often strengthened during intense trade tensions because global investors sought safety in US assets. This historical trend suggests that jumping to short the dollar on trade war news might be a risky move. The current situation is complicated by the Fed’s shift to a more dovish stance, which wasn’t as evident earlier in the previous conflict. With high volatility and no clear trend, derivative traders should think about strategies that benefit from price movement itself, regardless of direction. Options strategies like long straddles or strangles could effectively capture a breakout following Powell’s speech. Otherwise, managing tight risks while trading within the current range is the safest approach until a new turning point emerges. Create your live VT Markets account and start trading now.

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