OCBC strategists Sim Moh Siong and Christopher Wong report that rising oil prices and safe-haven demand have supported the US Dollar, changing earlier expectations of a steady decline. They expect the Dollar to be firmer in the coming months, with the DXY edging slightly lower over the next year while still supported by resilient US growth, a stabilising labour market, and a higher-for-longer Federal Reserve stance. They say oil’s sharp rally has shifted their near-term FX outlook towards a stronger USD, after previously expecting gradual weakness linked to US policy uncertainty, improving global growth, and stretched valuations. They also cite the March US employment report as stronger than expected, reducing the chance of further Fed easing and aligning with a hawkish repricing since the start of the US–Iran conflict.

Near Term Dollar Outlook

Over the past week, they note improved sentiment on hopes of de-escalation, with Brent falling back from early-week highs near USD119/bbl. They add that hawkish rate expectations were trimmed and the USD traded mixed against G10 peers. They state that if de-escalation becomes credible, the USD may return to a shallow depreciation trend as energy risks ease. A softer USD later in the year is linked to oil falling meaningfully in 2H26, while downside may be limited by resilient US growth and safe-haven demand. The initial 2026 playbook expecting a weaker dollar is now outdated. We have revised our view to favor USD strength in the coming months, driven by oil prices and a resilient US economy. The Dollar Index (DXY) recently touched a six-month high of 106.50, reflecting this shift in market dynamics. With tensions in the Middle East driving the market, uncertainty remains high. The recent retreat of Brent crude from its peak near $119 shows how quickly sentiment can turn on de-escalation news. For this reason, buying options to hedge against sudden reversals or to profit from expected price swings is a sensible approach.

Trading And Hedging Implications

The strong March employment report, which showed the US added 295,000 jobs while unemployment held at a low 3.7%, supports a hawkish Federal Reserve. This has significantly reduced the probability of rate cuts priced into futures markets for the second half of the year. We should therefore consider interest rate derivatives that bet on the Fed holding rates steady through the summer. Oil remains the primary catalyst for the dollar’s path, so we should structure trades around energy prices. While Brent crude has eased to around $114 per barrel, its high price continues to weigh on energy-importing economies like Japan and Europe. This makes shorting the EUR/USD or buying USD/JPY call options attractive as long as the energy shock persists. Even if de-escalation occurs and oil prices fall later this year, the dollar’s downside appears limited. US GDP growth is currently tracking at an annualized 2.1%, significantly outpacing the Eurozone’s 0.5%, a pattern we also observed for much of 2025. This economic resilience suggests selling out-of-the-money puts on the DXY to collect premium is a viable strategy, betting that any weakness will be shallow. Create your live VT Markets account and start trading now.

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