The US Dollar gained as risk aversion supported demand, extending weekly advances against major peers. With US stock and bond markets shut for Juneteenth, the diary is thin and April Retail Sales from Canada is the lone scheduled release, leaving markets to track Middle East developments and central bank commentary. Switzerland’s Foreign Ministry said planned US-Iran talks would not go ahead, after a US trip was cancelled following Israel’s attack in southern Lebanon; Iran’s Tasnim reported no confirmation that negotiators would travel, pending implementation of a Lebanon ceasefire condition in an interim agreement.
The USD Index rose for a third session, reaching its highest level since May 2025 above 101.10 before easing to around 100.90. The Bank of England kept Bank Rate at 3.75%, with two MPC members favouring a 25 bps hike, yet GBP/USD fell about 0.7% and hovered near 1.3200; Reuters reported Labour mayor Andy Burnham had won a northern England seat, raising political uncertainty. EUR/USD traded near 1.1450, its lowest since mid-March, despite ECB member José Luis Escrivá scoring 6.2/10 on the FXS Speechtracker versus a 4.8/10 average. Gold fell after dropping more than 1% on Thursday, trading near $4,150, while USD/JPY topped 161.80, its highest since July 2024, before holding above 161.00 as BoJ Deputy Governor Himino reiterated a likely path of rate hikes.
Dollar Demand and Market Dynamics
Given the risk-averse environment, we see the US Dollar’s strength as the primary trend to follow in the coming weeks. The cancellation of US-Iran talks amidst new conflicts in the Middle East is fueling a flight to safety, and with US markets closed for a holiday, thin liquidity could exaggerate this move. We believe positioning for continued dollar dominance is the most prudent strategy.
For derivatives traders, this suggests buying call options on the US Dollar Index (DXY) or dollar-tracking ETFs. Volatility is rising, with the Cboe Volatility Index (VIX) having climbed over 15% this week to trade above 18, making options an effective tool to hedge against or speculate on sharp market swings. We see the DXY testing higher levels as geopolitical uncertainty is unlikely to fade quickly.
Currency Moves and Trading Opportunities
The British Pound appears particularly vulnerable, and we anticipate further weakness against the dollar. The combination of a divided Bank of England and fresh political instability creates a clear bearish case for GBP/USD. We’ve seen this pattern before, such as during the 2022 UK political turmoil, where political uncertainty heavily punished the sterling.
Similarly, the Euro is failing to find support despite hawkish remarks from ECB officials. The yield spread between US and German 2-year bonds has widened to over 170 basis points, making dollar-denominated assets far more attractive and signaling further downside for EUR/USD. We are looking at put options to capitalize on a potential move toward the 1.1300 level.
We are cautious about being outright long USD/JPY at these levels due to the high risk of intervention from Japanese authorities. Instead, we are considering long-dated call options to participate in any further upside while capping potential losses from a sudden policy shift. The last major intervention cycle in late 2022 saw the pair drop over 10 yen in a matter of weeks, highlighting the risk of a sharp reversal.
Gold’s inability to rally in this risk-off climate underscores the dollar’s overwhelming strength. The negative correlation between the Dollar Index and gold has intensified to -0.8 over the past month, showing the dollar’s complete dominance over bullion pricing. We will avoid long gold positions and may even consider puts on gold futures until the dollar’s rally shows signs of exhaustion.
