Insights 
VT 
The US Dollar Index (DXY) is struggling to regain the 99.00 mark, finding support around 98.80. Ongoing fears of a trade war between the US and China are tempering any upward movement for the US Dollar.
On Friday, Donald Trump threatened to impose 100% tariffs on China, which increased market volatility. Trading on Monday saw the Index struggling to consolidate above 99.00, with other currencies also showing volatility.
Chinese Countermeasures
Chinese authorities responded to Trump’s tariff threat by affirming the possibility of implementing countermeasures if necessary. Meanwhile, the US Federal government shutdown continues into its third week, with no apparent resolution.
In Europe, political instability in France and Japan is feeding risk aversion, preventing the US Dollar from declining significantly. President Macron’s efforts to form a new government are struggling, while Japan’s Komeito Party has exited the ruling coalition, deepening the political crisis there.
A trade war typically involves escalating tariffs and trade barriers, raising import costs. The US-China trade war, which began in 2018, involved various tariffs from both countries. The return of Donald Trump as US President has revived these tensions, with renewed tariffs expected to impact global supply chains and inflation.
With the US Dollar Index caught in a narrow range around the 99.00 level, we see a classic standoff between opposing forces. Renewed trade war fears and an expected Federal Reserve rate cut are putting downward pressure on the dollar. However, political turmoil in both France and Japan is simultaneously boosting the dollar’s appeal as a safe-haven currency.
Market Uncertainty
The market’s uncertainty is palpable, with the CBOE Volatility Index (VIX) having recently spiked over 20, a level indicating significant investor anxiety. Consequently, we’ve seen implied volatility on one-month options for major pairs like EUR/USD and USD/JPY surge to multi-month highs. This makes hedging strategies using options more expensive but also more critical for managing risk in the coming weeks.
All eyes are now on the Federal Reserve, as data from the CME FedWatch Tool currently shows markets are pricing in an 89% probability of a 25-basis-point rate cut at the October 29th meeting. Federal Reserve Chairman Jerome Powell’s speech this Thursday is a pivotal event that could either validate these expectations or cause a significant repricing. Until then, the dollar is likely to remain highly sensitive to any incoming economic data.
This choppy price action in the DXY is also a reflection of divergent moves in its component currencies. While the dollar is weak against the Swiss Franc, instability in the Eurozone and Japan is preventing a broader dollar sell-off. The political crises in these regions are creating independent weakness in the Euro and the Yen, which is helping to prop up the index.
Looking back to the 2018-2019 period, we saw that the dollar often strengthened during the height of trade tensions as global capital sought safety in US assets. This historical precedent suggests that simply shorting the dollar on trade war news could be a premature and risky strategy. The current situation is complicated by the Fed’s dovish pivot, a factor that was less pronounced in the earlier stages of the previous conflict.
Given the high volatility and lack of a clear directional trend, derivative traders should consider strategies that profit from price movement itself, regardless of direction. Options strategies like long straddles or strangles could be effective in capturing a breakout should one occur after Powell’s speech. Otherwise, trading the current range with tight risk management is the most prudent approach until a new catalyst emerges.
