Insights 
VT 
The US Dollar Index has declined as the US government shutdown extends into its 19th day, lacking resolution. The prospect of rate cuts is nearly certain, with markets pricing a 100% chance for October and 96% for December, according to the CME FedWatch Tool.
The US Dollar remains steady around 98.50, impacted by the prolonged shutdown and anticipated Fed rate adjustments. The index measures the dollar’s value against six major currencies and has recently retraced its gains from the prior session.
Government Funding Lapse
This marks the third-longest government funding lapse in modern US history. Moreover, the likelihood of additional rate cuts by the Federal Reserve presents further challenges for the US Dollar.
St. Louis Fed President Alberto Musalem expressed openness to a rate cut if employment risks arise, emphasising a balanced approach. Easing trade tensions with China might support the dollar, as President Trump seeks a reduction in tariffs contingent on Chinese actions.
The US Dollar is the primary global currency, accounting for over 88% of global foreign exchange turnover. Fed decisions, quantitative easing, and quantitative tightening significantly influence its value, impacting economic stability and employment.
We see the US Dollar facing significant headwinds in the weeks ahead. The ongoing government shutdown and the market’s expectation of two more Fed rate cuts this year are creating a bearish environment. This suggests positioning for further dollar weakness against major currencies.
Currency Options and Volatility
Looking back, we saw the 35-day shutdown in late 2018 and early 2019 shave an estimated $11 billion from the US economy, a costly political stalemate. With this current shutdown now at 19 days, implied volatility on currency options is likely to rise. This makes buying put options on the dollar an attractive, though increasingly expensive, strategy to hedge or speculate.
The Federal Reserve’s dovish stance is the most powerful driver, with an October cut seen as a done deal. We saw a similar pattern back in 2019 when three consecutive rate cuts put a cap on the dollar’s strength for several months. Traders should therefore watch for signs of continued economic slowing, as recent data showed a slight uptick in weekly jobless claims to 215,000, reinforcing the case for the Fed’s actions.
The main risk to a short-dollar position remains the US-China trade negotiations. Any surprise breakthrough, like the “Phase One” deal we saw years ago, could spark a risk-on rally and temporarily support the dollar. Traders should monitor headlines from the upcoming meetings for any signs of progress on agricultural purchases or tariff reductions.
