U.S. Dollar Weakens for Second Day Amid Trade Disputes and Fed Rate Cut Speculations

The U.S. dollar faced continued pressure, extending losses against major global currencies for the second consecutive trading session. Its decline was fueled by escalating U.S.-China trade tensions, uncertainties surrounding the prolonged federal government shutdown, and growing speculation of a potential Federal Reserve rate cut, which collectively dampened market sentiment and investor confidence.

Dollar Decline Highlights Growing Uncertainty

According to TradingView data, as of 7:00 a.m. Korea Standard Time on October 16, the U.S. Dollar Index (DXY)—a benchmark measuring the dollar's strength against a basket of six major currencies—fell by 0.40% to 98.304, marking its second straight day of weakness. In intra-day trading, the index dropped to the low 98.30 range, representing its lowest level since last month. Over the past two sessions, DXY has fallen approximately 0.7%, underscoring the challenges facing the greenback amid growing uncertainties.

Safe-haven currencies offered a stark contrast as investors shifted away from the dollar to assets perceived as more secure. The Japanese yen and Swiss franc gained ground, with USD/JPY declining by 0.36% to 151.29 yen, and USD/CHF falling by 0.27% to 0.799 francs. These moves reflected heightened risk aversion in the forex market, largely attributed to geopolitical and economic instability.

U.S.-China Trade Tensions Weigh Heavily on Dollar

The intensification of U.S.-China trade tensions emerged as a key driver of the dollar's weakening trend. U.S. Treasury Secretary Scott Bessent and Trade Representative Jamieison Greer ramped up criticism of China's rare earth export restrictions, which were described as "a threat to the global supply chain." This criticism followed President Donald Trump's indication that additional tariffs on Chinese imports may be imposed, further exacerbating the trade dispute between the world’s two biggest economies.

The trade tensions, coupled with the ongoing U.S. government shutdown, created a volatile environment for financial markets. The shutdown has delayed the release of critical economic data, including jobs reports and manufacturing indicators, thus complicating the Federal Reserve's ability to assess economic conditions accurately. In a recent speech, Federal Reserve Chair Jerome Powell stated, "The labor market remains stuck in weak hiring and layoff patterns," signaling possible rate cuts in response to muted economic activity.

Market expectations for monetary policy shifts are mounting. Traders are increasingly anticipating a 25-basis-point rate cut during the Federal Open Market Committee (FOMC) meeting scheduled for October. Furthermore, projections for additional rate reductions later this year—and potentially three more next year—are gaining traction. A more dovish Federal Reserve stance has further weighed on the dollar, encouraging investors to pivot toward alternative assets and currencies.

Strengthening Non-Dollar Currencies

As the dollar falters, non-dollar currencies experienced notable gains, benefiting from relatively favorable domestic developments. The euro rose by 0.25% to $1.1635, supported by France’s proposal to suspend controversial pension reforms—a move that alleviated concerns about potential labor strikes and economic disruption in the Eurozone's second-largest economy.

Similarly, commodity-linked currencies such as the Australian and New Zealand dollars recovered significant ground. The Australian dollar (AUD) climbed by 0.54% to $0.6520, while the New Zealand dollar (NZD) rebounded from a six-month low to reach $0.5729—an increase of 0.24%. Both currencies benefited from easing concerns over China's growth prospects, a crucial factor for resource-based economies like Australia and New Zealand.

Experts Predict Prolonged Dollar Weakness

The outlook for the U.S. dollar suggests that its current challenges may extend into the foreseeable future. Adam Burton, a currency market analyst at ForexLive, commented in an interview with Reuters, "While market participants generally expect the U.S. and China to eventually reach a compromise in their trade dispute, the tone of official remarks remains combative." Burton further emphasized that a combination of prolonged government shutdown uncertainties, gloomy employment forecasts, and the Federal Reserve’s accommodative monetary policy stance could contribute to sustained periods of dollar weakness.

Investors will continue scrutinizing trade negotiations and Federal Reserve communications for signs of stability or worsening risks. These factors will play a decisive role in determining the trajectory of the dollar in the coming weeks.