Insights 
VT 
UBS analysts indicate that trade wars continue to threaten the US dollar. They suggest that some US trade partners might postpone deals with a possible Trump administration, seeking more favourable terms.
Such delays could result in renewed tariff escalations, increasing downside risks for the dollar. UBS observes limited opportunities for the Federal Reserve to raise interest rates, which typically bolsters the dollar.
Expected Economic Impact of Tariffs
Upcoming data is expected to reveal the economic impact of tariffs, leading markets to predict rate cuts, according to UBS. Consequently, they foresee a weaker long-term outlook for the US dollar.
UBS have made several observations that weigh negatively on the dollar’s future strength. Essentially, they’re pointing out how protectionist trade tensions and delayed negotiations by key export partners are aligning with an uncertain policy environment in Washington. This combination might push down the dollar’s value over time. Layered into this is the Fed’s limited flexibility in raising interest rates, as a result of both domestic growth constraints and an anticipated cooling in inflation momentum.
From our perspective, this sets up a multi-directional push in asset pricing. The reliable correlation between interest rate optimism and USD appreciation has softened. If there’s a perception that trade-related slowdowns are going to influence future CPI numbers or even job creation data releases, then rate probabilities will continue adjusting downward.
Trade-Related Slowdowns and Future Rate Probabilities
What we’re seeing now is a narrowing window for further dollar strength in the near-term. As traders, this may lead to shifting emphasis on relative value trades rather than USD outright exposures. We’d expect some to already be rotating into positions that benefit from weaker rate expectations in the US – particularly in EURUSD or AUDUSD carry differentials, where central banks abroad seem either at or near their cycle bottoms.
As for tariffs – their actual pass-through to pricing and output levels might take another few data cycles to show with clarity. Nevertheless, forward-looking positioning doesn’t have to wait. We’ve noticed that options pricing into September and October appears to reflect a rising premium on downside dollar risk, especially as measured via skew in DXY and S&P puts vs calls.
Powell’s comments following the next few core data prints will likely be dissected second-by-second, with any indirect references to inflation softness or trade-related demand slippage used as justification for faster easing expectations.
What makes this period especially delicate is that positioning remains unbalanced. Fund reports show institutional exposure to the dollar hasn’t meaningfully pulled back yet. That implies any downside headline could provide a catalyst for reallocation, compounding the direction in a non-linear fashion.
What follows is likely a period of increased noise-to-signal. Traders who rely on monthly data for guidance should pay closer attention to splits within jobs reports or monthly CPI sub-indexes that lend evidence to whether tariffs are hurting consumption directly, or indirectly through confidence channels.
Such directional uncertainty often favours gamma profiles over outright deltas. Structured strategies close to expiry can yield decent intraday range capture as the dollar pivots between rate expectations and risk aversion responses to global equities.
We are focused on how vol markets price binary political scenarios between now and November. The dollar’s next large move won’t be only about what the Fed chooses to do, but how much global participants believe the US approach to global trade will stabilise or harden. That perceived trajectory is now baked into options tons earlier than in past cycles.
