The US Dollar Index (DXY) fell after reaching a near 10-month high of 100.54 in the prior session. It traded around 100.20 during Asian hours on Monday, measuring the US Dollar against six major currencies. The US Dollar eased as risk aversion reduced after The Guardian reported that US Energy Secretary Chris Wright expects the US-Israel conflict with Iran to end within “the next few weeks”. This could allow oil supplies to recover and energy prices to fall.

Oil Markets React To Middle East Developments

West Texas Intermediate (WTI) crude opened with a gap higher but then dropped to about $96.30 a barrel at the time of writing. Kharg Island, which handles nearly 90% of Iran’s oil exports, was reportedly hit at every military site by US forces over the weekend. US President Donald Trump said oil infrastructure was not struck. Iran said it could retaliate against any US-linked oil facilities in the region. Trump asked allied nations, including the UK, France, China, and Japan, to help secure the Strait of Hormuz. Reports also point to a possible White House announcement in the coming days. EU foreign ministers are meeting in Brussels to discuss a naval response to the effective closure of the Strait. Some officials have suggested widening the existing maritime mission, but ministers are not expected to approve an immediate deployment.

Focus Shifts Toward Fed Policy Expectations

Attention now shifts to the US Federal Reserve meeting on Wednesday. No change to the federal funds rate is expected, but guidance may address inflation risks linked to higher energy prices. Looking back to 2025, we saw the US Dollar Index pull back from its highs as many expected the US-Iran conflict to resolve quickly. That situation was defined by high oil prices, with WTI trading above $96 a barrel, creating significant uncertainty. This environment suggested a potential for dollar weakness if the risk aversion faded. However, that dollar weakness was short-lived, and we have since seen the DXY climb to its current level around 104.25. The focus shifted from geopolitics to stubborn inflation, with the most recent Consumer Price Index report for February 2026 showing inflation still holding at 3.1% year-over-year. The Federal Reserve’s hawkish guidance, driven by a tight labor market, has become the dominant force moving the dollar. The significant geopolitical risk premium that pushed WTI crude toward $96 per barrel has now largely evaporated. With Middle East tensions having de-escalated through late 2025, oil prices have stabilized and are now trading near a much calmer $82 per barrel. Consequently, implied volatility in crude oil options has fallen considerably from the highs we saw during that period. Therefore, our focus should shift from oil-driven volatility plays to strategies centered on interest rate expectations. With the last Non-Farm Payrolls report showing a robust 275,000 jobs added, the Fed is unlikely to cut rates soon. This suggests opportunities in options on Treasury futures to hedge against a “higher for longer” interest rate scenario. Given the dollar’s persistent strength, we should be cautious about being long on currencies like the Euro or Yen. The interest rate differential heavily favors the US dollar against currencies whose central banks have been less aggressive. Selling call options on pairs like EUR/USD could be a viable strategy to capitalize on this dynamic in the coming weeks. Create your live VT Markets account and start trading now.

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