Insights 
VT 
The US Dollar Index (DXY) has weakened to around 98.70 during the early Asian session on Tuesday. This movement comes as the Federal Reserve is expected to cut interest rates by 25 basis points on Wednesday, potentially further reducing the benchmark rate to 3.75-4.00%.
Investors are pricing in a nearly 97% chance of this rate cut, according to the CME FedWatch tool. Policymakers are debating rate adjustments amidst a US government shutdown, considering a slowing labour market and inflation above the Fed’s 2% target.
Us China Trade Talks
US Treasury Secretary announced a preliminary US-China consensus on key issues, with a potential deal to be finalised during Trump’s meeting with Xi Jinping in South Korea, possibly lifting the US Dollar. The US Dollar (USD) plays a major role globally, accounting for over 88% of foreign exchange turnover, driven by Fed’s monetary policies including rate adjustments and measures like quantitative easing.
Quantitative easing, used during the 2008 financial crisis, typically weakens the Dollar, while quantitative tightening can strengthen it. These policies play a crucial role in the USD’s global value.
The current market feels very different from the situation we saw in the past when the US Dollar Index was below 99. As of today, October 28, 2025, we see the DXY holding firm around 106.50, reflecting a much higher interest rate environment than the one discussed in that historical analysis. This shows how central bank policy has dramatically shifted over the years.
The Federal Reserve is now facing a different challenge, with the benchmark rate at 4.50-4.75% and a decision coming next week. Recent data showed core CPI for September 2025 still sticky at 3.1%, while the latest unemployment figures nudged up to 4.2%. This conflicting data makes the Fed’s next move highly uncertain, unlike the near-certainty of a cut seen in some past meetings.
Market Volatility And Trading Strategies
We are seeing traders price in significant volatility around next week’s Fed announcement, with the Cboe Volatility Index (VIX) climbing above 18 this month. Unlike the past scenario where markets had priced in a 97% chance of a rate move, current options pricing suggests a roughly 50/50 probability of either a hold or a final 25-basis-point hike. This indecision is creating opportunities for those betting on sharp price swings.
For those uncertain of the Fed’s direction, straddles or strangles on currency ETFs like UUP could be a logical play to capture a large move in either direction. If we believe the Fed will signal a definitive end to its hiking cycle, buying DXY puts could offer a way to profit from a potential dollar decline. Conversely, call options would be the tool if inflation data spooks the Fed into one last hike.
Beyond the Fed, we are also watching ongoing trade negotiations with the European Union regarding digital services taxes, which could introduce new volatility. A positive resolution could boost risk sentiment and weigh on the dollar as a safe-haven asset. Any breakdown in talks, however, would likely strengthen the dollar, adding another layer for traders to consider.
Looking at the latest CFTC data from last week, we can see large speculators have slightly reduced their net-long positions on the US dollar. This suggests that while many still favor the dollar, conviction is waning ahead of the Fed’s pivotal decision. Derivative traders should monitor this positioning for signs of a more significant sentiment shift in the coming weeks.
