Global risk mood is weakening as oil prices rise, equities and bonds fall, and the US dollar gains against most currencies. Brown Brothers Harriman links this to the risk of a lasting energy shock tied to the Iran war. A prolonged energy shock could keep central banks in restrictive policy settings and add to financial stability risks. It could also worsen government debt by making it more fragile and harder to sustain.

Dollar Strength Driven By Funding Stress

The bank says the dollar may keep rising mainly because demand for US dollar funding is increasing, rather than from safe-haven buying. Short-term dollar funding demand often jumps in periods of stress due to the dollar’s role in trade invoicing, cross-border lending, global bond issuance, and FX reserves. Dollar funding strain can be seen in the cross-currency basis moving towards a narrower and more negative level, which is happening now. The article notes it was produced using an Artificial Intelligence tool and checked by an editor. Global risk sentiment is getting worse as oil rises while stocks and bonds fall, strengthening the U.S. dollar. With WTI crude recently breaking through $110 a barrel amid escalating tensions in the Strait of Hormuz, we have seen the S&P 500 slip below 4,800 this month. This combination points toward increasing stress in the financial system. This sustained energy price shock seems to be trapping central banks, forcing them to maintain high interest rates to fight inflation. This keeps government debt paths looking fragile, as we’ve seen the 10-year Treasury yield push back toward 4.50%, a level not seen since late 2025. This restrictive environment makes it difficult for both corporations and governments to service their debt.

Trade Ideas For Volatility FX Oil And Rates

This environment means the dollar’s strength is being driven more by funding needs than simple safe-haven flows. We can see this pressure building as the Dollar Index (DXY) tests the 107.00 level. The 3-month EUR/USD cross-currency basis swap has also widened to -40 basis points, its most negative reading since the banking turmoil we observed back in 2025. Derivative traders should consider positions that benefit from falling equity markets and rising volatility. Buying put options on major indices could be a direct way to play the downside. At the same time, VIX call options might offer a hedge against a sharper spike in fear. In the currency markets, we see value in being long the dollar, particularly against currencies of nations with high USD-denominated debt. Rather than a simple long dollar trade, consider put options on emerging market currency ETFs. This strategy aligns with the view that funding stress, not just risk-off sentiment, is the primary driver. Given the upward pressure on crude, call options on oil futures or related ETFs remain attractive to capture further upside from the ongoing geopolitical tensions. For fixed income, positions that profit from falling bond prices, such as puts on long-duration Treasury ETFs, align with the expectation of continued restrictive central bank policy. Create your live VT Markets account and start trading now.

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