The US dollar did not gain support from risk aversion on Friday, 6 March, even as Brent crude rose above USD90 per barrel during the Israel-US-Iran war. This suggested weaker demand for the dollar’s safe-haven role during geopolitical tension and higher oil prices. US data also weighed on the currency after February nonfarm payrolls fell short of expectations, at -92k versus a +55k consensus. The miss challenged the idea of a resilient labour market that had supported the Federal Reserve’s extended pause.

Shifting Policy Expectations

At the same time, markets removed expectations of two Bank of England rate cuts and priced in two European Central Bank rate hikes this year. This shift increased focus on monetary policy differences between the US, the UK, and the euro area. Political instability in Washington was also cited as a factor, with changes in the executive branch reducing perceptions of steady governance. The dollar may face further pressure if higher US Treasury yields are linked more to fiscal sustainability concerns than to inflation. Looking back to early 2025, the breakdown in the US Dollar’s traditional safe-haven status was a critical turning point for our strategy. We saw the currency fail to rally despite soaring oil prices and geopolitical conflict, a clear signal that the market’s underlying drivers were changing. This divergence from historical patterns meant old assumptions had to be discarded. The negative US nonfarm payrolls report from February 2025, which showed an unexpected loss of 92,000 jobs, was the first major crack in the narrative of a resilient US economy. This trend continued, with the US unemployment rate steadily climbing from 3.9% to 4.5% by the end of 2025. This sustained labor market weakness has kept the Federal Reserve in a defensive posture throughout the past year.

Trading Strategy Implications

The monetary policy divergence we anticipated has materialized and continues to drive currency markets. While the European Central Bank did indeed hike rates twice in 2025 to combat inflation, the weakening US data forced the Federal Reserve to pivot, delivering a rate cut in January 2026. This policy gap has been the primary engine lifting the EUR/USD exchange rate from around 1.08 to its current trading range above 1.15. For the coming weeks, traders should consider buying call options on currency pairs like the AUD/USD and EUR/USD to gain leveraged upside exposure to continued dollar weakness. With currency market volatility remaining elevated, these options allow for participation in the trend while clearly defining risk. The strategy is to position for a dollar that no longer benefits from global risk aversion. The focus has now firmly shifted from simple inflation metrics to the much larger issue of US fiscal sustainability. With the US debt-to-GDP ratio having now surpassed 135%, a stark increase from a year ago, higher Treasury yields are increasingly being interpreted as a credit risk premium rather than a sign of economic strength. This structural problem suggests the dollar’s path of least resistance is lower. Using futures contracts to hedge or maintain short positions against the US Dollar Index (DXY) remains a core strategy. The index’s decline from over 104 in early 2025 to its current level near 98 validates this bearish thesis. We expect any short-term dollar rallies to be met with selling pressure as the weight of weak economic data and fiscal concerns cap any significant upside. Create your live VT Markets account and start trading now.

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