Renewed risk aversion has supported the US Dollar as the Iran conflict escalates. Oil prices have risen, while global equity and bond markets have weakened, and the Dollar has gained against most major currencies.
Market conditions reflect concerns about an energy shock, tighter policy by major central banks despite weak growth, and higher borrowing costs affecting public finances. These factors have weighed on risk assets and increased demand for Dollar funding during periods of market stress.
Axios reported that the US is developing military options for a “final blow” in Iran, which could include ground forces and a massive bombing campaign. Developments in the conflict, including Iran’s response, remain a key source of uncertainty for market sentiment.
Renewed risk aversion is pushing the Dollar higher, reminding us of the turmoil during the Iran conflict back in 2025. The US Dollar Index (DXY) has just breached the 106.5 level for the first time this year, reflecting a flight to safety. This is happening as oil prices are firming up and global equities are showing weakness.
The market is reacting to an emerging energy shock, with WTI crude futures now trading above $90 a barrel on fears of new supply disruptions in the Persian Gulf. We are seeing the CBOE Volatility Index (VIX) climb toward 20, a clear signal of rising uncertainty among traders. While this is not yet the VIX level of 30+ we saw during the peak of the 2025 war, the upward trend is concerning.
This is a brutal mix for risk assets, as major central banks seem determined to hold interest rates higher for longer to combat sticky inflation. With the 10-year Treasury yield now pushing back above 4.5%, rising borrowing costs are squeezing already stretched corporate and public finances. This environment creates dollar funding needs during market stress, putting a floor under the currency.
For the coming weeks, a key strategy will be to buy protection against further downside in equities, likely through purchasing put options on major indices like the S&P 500. At the same time, we see opportunities in going long the US Dollar through futures or call options against currencies sensitive to risk and energy prices. Volatility itself can be a profitable trade, with VIX call options offering a direct way to position for an increase in market fear.
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