Middle East Tensions Support The Dollar
The Houthis said they launched two missiles at Israel within 24 hours and warned of more attacks in the coming days. The report also cited concerns that disruption in the Bab el-Mandeb Strait, alongside the effective closure of the Strait of Hormuz, could hit global trade. Higher oil prices added to inflation worries and supported expectations of tighter US Federal Reserve policy, which helped the Dollar. Even so, the pair lacked follow-through, with attention on whether it can hold above 0.8000 before extending the month’s rise. The Swiss Franc is among the 10 most traded currencies and was pegged to the euro from 2011 to 2015; when the peg ended, it rose by more than 20%. Switzerland targets inflation below 2%, and the Swiss National Bank meets four times a year. We recall the environment back in early 2025, where geopolitical tensions were a primary driver for a stronger US dollar. The conflict in the Middle East fueled safe-haven demand for the greenback, pushing USD/CHF toward the 0.8000 resistance level. At the time, fears of rising oil prices disrupting global trade created expectations for a hawkish Federal Reserve.Central Banks Drive The New Narrative
The landscape has since shifted dramatically as we enter the second quarter of 2026. Diplomatic efforts throughout late 2025 led to a de-escalation in the Middle East, reducing the dollar’s appeal as a conflict hedge. The market’s focus has now moved away from geopolitics and squarely onto the diverging actions of central banks in a cooling global economy. Inflation, the major concern a year ago, has subsided significantly. The latest US Consumer Price Index report for February 2026 showed headline inflation at 2.5% year-over-year, well below the highs seen during the 2024-2025 period. This trend has given the Federal Reserve the room it needed to change its stance on monetary policy. In response to slowing growth and tamed inflation, the Fed initiated its first interest rate cut of 25 basis points at its meeting last week. This pivot has confirmed a new easing cycle, fundamentally weakening the outlook for the US dollar. We expect this to weigh on the USD/CHF pair for the foreseeable future. However, the Swiss National Bank (SNB) is also in an easing mood, having already cut its own policy rate earlier this month. Swiss inflation is even lower, tracking at just 1.1%, giving the SNB a strong incentive to prevent the franc from appreciating and harming its export-driven economy. This creates a dynamic where both currencies are weakening, making volatility a key factor. Given that both the Fed and the SNB are now cutting rates, the direction of USD/CHF will depend on which bank is perceived as more dovish. With the pair currently trading around 0.9150, the 0.8000 level of 2025 is a distant memory. We should consider using options to trade the expected volatility around upcoming central bank announcements rather than placing simple directional bets. For the coming weeks, we see value in strategies that benefit from price swings. Buying straddles or strangles ahead of the next SNB or Fed meetings could be an effective way to capitalize on the uncertainty. Alternatively, traders who believe the Fed’s easing will outpace the SNB’s could look at buying call options with strikes above 0.9200. Create your live VT Markets account and start trading now.
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