The US Dollar Index (DXY) was near 99.35 in Asian trading on Thursday, moving above 99.00. It edged higher as conflict in the Middle East escalated, with US weekly Initial Jobless Claims due later on Thursday. Market focus remained on disruption risks around the Strait of Hormuz. Iran launched what was described as its most intense operation since the start of the war to try to halt traffic through the oil route, while Bahrain reported fuel tanks at one facility were targeted and an Iraqi port official said two foreign tankers were hit, caught fire, and leaked oil.

Inflation Data And Fed Expectations

In US data, the Consumer Price Index rose 0.3% month on month in February, compared with 0.2% previously, matching expectations. Core CPI rose 0.2% month on month, down from 0.3% before, also in line with estimates. Annual CPI inflation rates were unchanged from January, leaving inflation above the Federal Reserve’s 2% target. Markets priced in nearly a 99.5% chance of no rate change at the Fed’s March meeting, according to CME FedWatch. Looking back at the situation in early 2025, the escalating conflict in the Middle East was a clear signal for a flight to safety. The US Dollar Index (DXY) was pushing higher, reflecting this sentiment. At that time, we saw the DXY strengthen toward the 104 level through March and April 2025, confirming the safe-haven demand. Derivative traders should have interpreted this as a cue to go long the US dollar. Buying call options on dollar-tracking ETFs like the Invesco DB USD Bullish Fund (UUP) would have been a direct way to profit from this trend. These positions would have benefited from both the geopolitical tension and the Federal Reserve’s steady hand on interest rates.

Oil Supply Risk And Volatility Hedges

The direct threat to the Strait of Hormuz pointed to a significant risk for global oil supply. We remember West Texas Intermediate (WTI) crude oil prices hovering in the low $80s per barrel range during that period. This made call options on crude oil futures or energy sector ETFs a logical trade to hedge against or speculate on a supply shock. Such geopolitical uncertainty typically fuels market volatility, making the CBOE Volatility Index (VIX) a key instrument to watch. In March 2025, buying VIX call options would have been a prudent hedge against a broader market sell-off triggered by worsening conflict. As of today, the VIX is trading much lower, near 14, highlighting that this was a specific, event-driven opportunity. With the market almost fully pricing in a hold from the Fed in March 2025, the focus shifted to the future path of interest rates. We now know the Fed began to signal rate cuts later that year, which ultimately happened. Astute traders at the time would have used options on Secured Overnight Financing Rate (SOFR) futures to position for this eventual pivot away from a hawkish stance. Create your live VT Markets account and start trading now.

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