US Dollar Index flat lines above 99.00 on hope for compromise in US-China trade war

• US Dollar Index trades flat around 99.25 in Tuesday’s early Asian session. 

• Hope for a compromise in US-China trade war supports the US Dollar. 

• Dovish comments from Fed policymakers and the US government shutdown might cap the upside for the DXY. 

The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, trades on a flat note near 99.25 during the early Asian session on Tuesday. The DXY holds steady as US President Donald Trump's watered-down rhetoric against tariffs on China. The Federal Reserve’s (Fed) Chair Jerome Powell speech will be in the spotlight later on Tuesday. 

On Friday, Trump threatened China with 100% tariffs beginning on November 1. However, he tempered his tone on Sunday, saying, "Don't worry about China, it will all be fine.” US Treasury Secretary Scott Bessent stated on Monday that Trump remains on track to meet Chinese leader Xi Jinping in South Korea in late October. 

A potential meeting with his Chinese counterpart raised hopes of de-escalation in trade tensions between the world’s two largest economies. This, in turn, could provide some support to the Greenback. 

On the other hand, dovish remarks from the Federal Reserve (Fed) officials might cap the upside for the US Dollar. Philadelphia Fed Anna Paulson said on Monday that she anticipates more interest rate cuts to support the job market, as trade tariffs now appear unlikely to push up inflation as much as expected.

Markets are currently pricing in an almost certain 25 basis points (bps) rate cut at the Fed’s October meeting, with another reduction expected in December, according to the CME FedWatch tool.

The US government shutdown has entered its third week with no resolution in sight. The Senate returns Tuesday and is expected to vote again on a House-passed measure to fund the government. A prolonged US federal shutdown could raise concerns over the impact on the US economy, which could exert some selling pressure on the DXY.