Insights 
VT 
The US Dollar has shown increased strength this week, with US credit market concerns no longer affecting the FX market. A large correction in gold prices may have supported the dollar, according to FX analyst Francesco Pesole.
Pesole mentioned that any further rally for the dollar will be challenging unless markets reconsider one of the anticipated three Fed cuts by March. A potential catalyst for this market shift would be an unexpectedly high Consumer Price Index figure, which is not expected.
Us China Tensions
Tensions between the US and China could also influence the dollar’s stability. A scheduled meeting between Trump and China’s President Xi is uncertain, which could affect market sentiment. Although no meeting does not automatically lead to higher tariffs, it may still impact risk sentiment and the dollar.
The US Dollar’s strength is showing signs of exhaustion as the Dollar Index (DXY) struggles to push past the 106.50 resistance level. After a strong run-up this quarter, further gains for the greenback will be difficult to sustain from here. We are seeing signs that the market may be reaching a peak.
Much of this is tied to shifting expectations for the Federal Reserve, as the September CPI report showed core inflation cooling to 3.5%. The market is now pricing in a near-zero chance of another rate hike by year-end, which is weighing on the dollar’s appeal. This contrasts sharply with the hawkish repricing we saw earlier in the year.
This environment is reminiscent of the volatility we experienced during the Trump administration’s trade negotiations with China in the late 2010s. During that period, simple rhetoric or the prospect of a canceled meeting was enough to inject serious uncertainty into currency markets. We believe a similar dynamic could be re-emerging now.
Us China Relations
Attention is now turning back to US-China relations, especially with ongoing debates in Washington over potential new tariffs on Chinese electric vehicles. A souring tone in these discussions could easily damage risk sentiment. Such a development would likely reignite fragility in the dollar.
For derivative traders, this suggests that outright long positions on the dollar carry significant risk in the coming weeks. We believe considering strategies that profit from either a capped upside or a potential decline, such as selling out-of-the-money call options or buying protective puts on dollar-centric pairs, could be a prudent approach. This allows for positioning against dollar strength without taking on excessive directional risk.
