US Dollar Index weakens below 99.00, US-China trade talks in focus

• US Dollar Index softens to around 98.90 in Wednesday’s early European session. 

• Fears of a prolonged US government shutdown and the prospect of Fed rate cuts undermine the DXY. 

• Traders will closely monitor the US-China trade talks. 

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 negative note near 98.90 during the early European session on Wednesday. The DXY weakens after three consecutive days of gains amid the ongoing US federal shutdown. 

The US government shutdown has entered its 22nd day as the Senate on Monday failed for the 11th time to advance a House-passed measure to fund the government and end the ongoing shutdown. The 50-43 vote fell mostly along party lines. 

A failure by Congress to pass funding legislation can erode investor confidence in US economic governance and weigh on the US Dollar against its rivals. Additionally, the release of important economic data from the Bureau of Labor Statistics and the Census Bureau is suspended, complicating decision-making for the Federal Reserve (Fed). 

Fed funds futures are currently pricing in nearly a 98.9% chance of a 25 basis points (bps) cut to interest rates at the central bank's meeting on October 29, up from 99.4% odds yesterday, according to the CME FedWatch tool.

On the other hand, positive developments surrounding the US-China relations could help limit the DXY’s losses. US President Donald Trump late Tuesday predicted an upcoming meeting with his Chinese counterpart, Xi Jinping, would yield a “good deal” on trade. However, Trump also conceded that the highly anticipated talks may not happen. US Treasury Secretary Scott Bessent is scheduled to meet with his Chinese counterparts to discuss a de-escalation of trade tensions ahead of the US-China trade talks.