The US Dollar (USD) continues its upward momentum, nearing the upper limit of its range from June despite a data blackout caused by the US government shutdown. Influencing factors include external events, such as political issues in France and Japan, rather than positive US fundamentals. This makes the USD susceptible to a decrease if global conditions improve.

The Federal Open Market Committee (FOMC) minutes from their 17-18 September meeting give context to a potential further easing of policy. Participants expressed concerns about the labour market, though some felt the federal funds rate could remain unchanged. The FOMC projects two more 25bps rate cuts by the end of the year, aligning with current futures pricing.

Federal Reserve Concerns

Fears exist that the Federal Reserve may adopt a more lenient stance by the December FOMC meeting due to the impact of restrictive monetary policies. Fed Chair Jay Powell is giving pre-recorded remarks today, with no opportunity for a Q&A session. GBP/USD and EUR/USD are experiencing declines, moving towards key levels, driven by USD strength and global uncertainties. Meanwhile, gold and cryptocurrencies like Bitcoin and Ethereum are navigating mixed market conditions, with gold maintaining upward potential as the possibility of rate cuts aids its performance.

We see the US Dollar’s current strength as fragile, driven more by political uncertainty in France and Japan than by a healthy US outlook. The ongoing government shutdown, now past the one-week mark similar to the beginning of the 16-day shutdown in 2013, means we are flying blind without key economic data. This setup suggests the dollar is vulnerable to a sharp reversal once global risks calm down.

The Federal Reserve seems set on cutting rates at least twice more before year-end, which should eventually weigh on the dollar. We recall the last jobs report for August showed a significant slowdown to just 95,000 new jobs, justifying the Fed’s concern for the labor market. With the last core inflation reading at a manageable 2.1%, the path is clear for more easing.

This lack of official data creates significant uncertainty, which is a trading opportunity in itself. We’ve seen the VIX hold above 22, indicating sustained market anxiety that can be capitalized on with volatility strategies like straddles. Look for elevated premiums on options for major currency pairs and indices, especially those expiring after the December 9-10 FOMC meeting.

Long Term Dollar Outlook

For a longer-term view, positioning for dollar weakness seems prudent once the shutdown ends. Using put options on the dollar index or call options on Gold for December or January expiry could capture the expected Fed-driven decline. Gold’s strength near $4,000 is a direct reflection of this expectation for lower US interest rates.

In the immediate term, however, fighting the dollar’s momentum is risky while external headwinds persist. The political situation in France has not yet stabilized, providing the dollar with temporary safe-haven support. Any short positions on the dollar should be managed with tight stops until the government reopens and data flow resumes.

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