The US Dollar Index (DXY) traded near 99.40 in early European hours on Tuesday after recovering the prior day’s losses. Markets awaited the flash S&P Global US PMI for March for more clues on US economic conditions. Demand for the US Dollar rose as uncertainty around the Iran conflict increased and attention turned to possible disruption of energy infrastructure. Gulf states aligned with the US were reported to be moving closer to direct involvement.

Geopolitical Risk Lifts Dollar Demand

A Wall Street Journal report said Saudi Arabia signalled a possible move towards more direct military engagement. Israel and the United States carried out further strikes on Iran, while Iran stepped up attacks on Gulf neighbours and issued threats against regional assets. Israel said it carried out a second round of strikes on infrastructure in Tehran. Iranian military adviser Mohsen Rezaei said the conflict would continue until Iran is compensated for damages. On Monday, the Dollar rose after President Donald Trump delayed planned strikes on Iranian energy infrastructure by five days and referred to talks with Tehran. Iran’s Foreign Minister Abbas Araghchi said no engagement with Washington had taken place. Reuters reported that Fed official Mary Daly said sustained oil price rises could complicate the policy outlook. The US Dollar is involved in over 88% of global FX turnover, with an average of $6.6 trillion per day in 2022.

Markets Focus On Policy And Volatility

We are seeing a familiar pattern of safe-haven demand for the US Dollar, reminiscent of the tensions with Iran back when we were looking at it in 2025. At that time, geopolitical uncertainty pushed the Dollar Index to around 99.50. Today, with the index trading significantly higher near 104.20, the stakes are elevated due to renewed tensions in Eastern Europe. The recent rise in WTI crude to over $88 a barrel directly echoes the concerns Fed officials voiced in 2025 about energy prices complicating monetary policy. The latest FOMC minutes from early March 2026 already showed a committee hesitant to signal rate cuts. This sustained price pressure will only reinforce the hawkish stance of several members. This environment suggests traders should consider using options to manage risk and express a view on dollar strength. With the VIX index climbing back above 18, buying call options on dollar-related ETFs like UUP offers a defined-risk way to profit from further upside. This is a prudent strategy given the conflicting signals from a strong dollar and softening domestic economic data. Traders must also watch the economic calendar, as the dollar’s strength is not guaranteed. For instance, the flash S&P Global US Services PMI for March dipped to 51.8, indicating a potential slowdown that could eventually weigh on the currency. This creates a challenging dynamic where geopolitical safety competes with underlying economic performance. The core of the current market is uncertainty, which makes trading volatility itself an attractive strategy. Long volatility positions through VIX futures or options could perform well if geopolitical headlines continue to dominate. This allows for a market-neutral approach, betting on sharp price swings in either direction rather than just dollar strength. Create your live VT Markets account and start trading now.

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