Brown Brothers Harriman said recent market moves were driven by war-related news, with shipping safety in the Strait of Hormuz acting as a key gauge of risk sentiment. Brent crude oil rose back above $100 a barrel and the US dollar strengthened against all major currencies, pushing DXY to its highest level in nearly ten months.
The bank said the dollar has tactical support from safe-haven demand linked to shipping risks and short-term US dollar funding needs. It added that demand for short-term USD funding often rises during stress because the dollar is widely used for trade invoicing, cross-border lending, global bond issuance, and FX reserves.
BBH said it remains cyclically neutral on the US dollar and expects DXY to return to a 96.00–100.00 trading range. It also said DXY has moved beyond the level implied by interest rate differentials between the US and other major economies.
BBH maintained a longer-term bearish stance on the dollar, citing weaker confidence in US trade and security policy, worsening US fiscal credibility, and the politicisation of the Federal Reserve. The article stated it was produced using an AI tool and reviewed by an editor.
Looking back at the events of 2025, we saw the dollar get a strong tactical bid from haven demand. Tensions surrounding shipping in the Strait of Hormuz pushed Brent crude over $100 and the DXY Dollar Index to a ten-month high. This was a classic flight to safety, where dollar funding needs spiked during a period of intense geopolitical stress.
That tactical support for the dollar has now faded as we move through the first quarter of 2026. While the situation in the Strait of Hormuz remains tense, shipping insurance war risk premiums have fallen over 20% from their late 2025 peaks, signaling a decrease in the market’s “peak fear.” Consequently, the short-term, fear-driven demand for US dollars has subsided for now.
The cyclical view from last year has proven correct, as the DXY has since retreated into the predicted 96.00-100.00 range. As of today, the index is trading around 98.60, a level more consistent with the narrowing interest rate differentials between the U.S. and other major economies. Markets are now pricing in at least one Fed rate cut by the end of 2026, a sharp contrast to the hawkish stance seen last year.
For derivative traders, this suggests that selling dollar volatility could be a prudent strategy in the coming weeks. With the DXY expected to remain range-bound, option-selling strategies like short strangles on major pairs such as EUR/USD or USD/JPY could be effective. These positions would profit from sideways price action and declining implied volatility.
However, the long-held structural bearish view on the dollar is becoming more relevant. Worsening US fiscal credibility is a key factor, with the latest Congressional Budget Office report from February 2026 projecting the US debt-to-GDP ratio to hit 109% by year-end. This ongoing concern, combined with the politicization of economic policy ahead of the midterm elections, weighs on the dollar’s long-term appeal.
Therefore, traders should also consider establishing longer-term bearish positions on the dollar. Buying long-dated put options on the DXY or dollar-tracking ETFs with expiries of six months or more offers a low-cost way to position for a potential breakdown below the 96.00 support level. This strategy allows one to capitalize on the structural weakness we see building, should it accelerate later in the year.
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