The US Dollar extended its rise following the Trump-Xi summit and the Federal Open Market Committee meeting. Market speculations of month-end USD demand were noted by OCBC’s Frances Cheung and Christopher Wong.

During the Trump-Xi summit, both countries agreed to a one-year trade truce. Details include China purchasing 12 million tons of soybeans this year and 25 million tons by 2026. China will delay its export restrictions on rare earth for a year, and the US will cut the fentanyl tariff rate to 10%. The TikTok transaction will resume, and no new port fees will be imposed for another year.

The Rise And Impact Of USD

The USD rose against various currencies, with the daily USD/CNY fix at 7.0880. The rise in USD/JPY, following disappointment with the Bank of Japan, also contributed to the USD’s broad rise. The USD/AXJ’s future movement may depend on unique factors until a clearer trend emerges.

Analysts suggest the USD may trend moderately lower, but without significant US data or commitments from Fed Chair Powell, some adjustments could occur. A more positive US-China relationship and the Fed’s easing cycle could support RMB and risk-proxy FX like the AUD, with the USD potentially trading lower unless faced with unexpected equity sentiment changes.

The US dollar has strengthened following the positive outcome of the Trump-Xi summit, where a one-year trade truce was agreed upon. This move seems to be a classic case of “buy the rumor, sell the fact,” potentially combined with typical month-end demand for the dollar. For now, the market is digesting this news, which includes China resuming significant soybean purchases and delaying rare earth restrictions.

This sudden de-escalation in trade tensions has caused implied volatility to drop sharply across asset classes. We’ve seen the CBOE Volatility Index (VIX) fall below 14 for the first time in months, making options premiums significantly cheaper. This presents a favorable environment for traders looking to establish new positions with defined risk over the coming weeks.

Opportunities In A Low Volatility Environment

Given the fundamental outlook of a Federal Reserve in an easing cycle and calmer US-China relations, we see the recent dollar strength as a potential selling opportunity. The agreement for China to buy 12 million tons of soybeans this year should provide a floor for agricultural commodity prices, a sector heavily impacted by trade disputes we saw back in the 2018-2020 period. Traders may consider buying call options on soybean futures to capitalize on this renewed demand.

The broader expectation is for risk-proxy currencies, like the Australian dollar, to benefit against the greenback. Looking back at data from early 2025, the AUD/USD pair showed strong positive correlation to improvements in trade sentiment. With the Reserve Bank of Australia holding rates steady, any sign of US dollar weakness could be amplified in pairs like AUD/USD.

Therefore, traders should consider using the current strong dollar as an attractive entry point to position for its potential decline. This could involve buying put options on dollar-tracking ETFs or purchasing call options on currencies like the Australian dollar. The current low-volatility environment makes these strategies relatively inexpensive to implement for the weeks ahead.

Create your live VT Markets account and start trading now.