Insights 
VT 
The US Dollar Index (DXY) is stabilising at around 99.00, buoyed by hopes of a trade deal between the US and China. President Trump anticipates reaching several agreements with Chinese President Xi Jinping, which might include discussions on soybean exports and nuclear weapons.
Meanwhile, the Trump administration is contemplating restricting exports to China that use US software, from laptops to jet engines. This move responds to China’s limits on rare earth exports. Such geopolitical tensions can impact currency values and trade relationships.
Federal Reserve Rate Expectations
In the context of monetary policy, a Reuters poll shows 115 of 117 economists foresee the Federal Reserve cutting rates by 25 basis points in October. There’s a 97% market expectation for a Fed rate cut, with a 96% chance of another in December, according to the CME FedWatch Tool.
In broader economic terms, the US Dollar remains pivotal in global finance. It became the world’s reserve currency post-World War II and is still essential in transactions worth $6.6 trillion daily. The Federal Reserve influences its value through monetary policy, impacting inflation and unemployment. Quantitative easing (QE) and quantitative tightening (QT) also play roles, with QE generally leading to a weaker dollar and QT strengthening it.
We’ve seen this kind of environment before, where conflicting headlines create choppy markets. Back when the US Dollar Index was near 99, we saw it whipsaw on rumors of a US-China trade deal one day and threats of export restrictions the next. That period taught us that the dollar is highly sensitive to both monetary policy expectations and geopolitical headlines.
Today, on October 23, 2025, the situation has similar crosscurrents, though the details have changed. The US Dollar Index is much stronger now, currently trading around 106.50, driven by the Federal Reserve’s aggressive rate-hiking cycle that peaked in 2024. However, with the latest September CPI data showing core inflation remaining sticky at 3.1%, the Fed is holding rates steady, creating uncertainty about its next move.
This uncertainty mirrors the past, where markets priced in a near-certainty of rate cuts. While the Fed’s official stance remains hawkish, the CME FedWatch Tool now shows the market is pricing in a 75% probability of the first rate cut by March 2026. This growing divergence between the Fed’s messaging and market expectations is a key source of potential volatility for the dollar.
Global Supply Chain Realignment
The primary geopolitical driver is no longer a single trade deal but a broader global supply chain realignment. We are seeing continued “de-risking” from China, with US firms increasing investment in manufacturing in Mexico and Vietnam. Any news that accelerates or complicates this delicate process can cause sudden moves in the dollar, much like the Trump-Xi meetings once did.
For derivative traders, this environment suggests that straightforward directional bets on the dollar are risky. Instead, strategies that profit from increased volatility, such as buying straddles or strangles on major currency pairs like EUR/USD, could be more prudent. With the VIX index holding above 18, the market is already pricing in more chop, and options can be used to capitalize on large price swings in either direction.
We must also remember the Fed is still engaging in quantitative tightening, letting bonds mature off its balance sheet each month. This process mechanically reduces liquidity and is a background force supporting a stronger dollar. This tightening clashes with the market’s growing expectation for rate cuts, creating a tense dynamic that should fuel trading opportunities in the coming weeks.
