OCBC strategists said higher oil prices and safe-haven demand have supported the US dollar, reversing earlier expectations of a steady decline. They now expect a firmer USD in the coming months, with the DXY edging slightly lower over the next year but staying supported by resilient US growth, a steadier labour market and a Federal Reserve stance that stays restrictive for longer. They revised their FX outlook after a sharp rise in oil prices changed their earlier view, which had been based on US policy uncertainty, improving global growth and stretched valuations. They also cited the March US employment report, which came in stronger than expected, as a factor reducing the chance of further Fed easing. Over the past week, market mood improved on hopes of de-escalation linked to the US–Iran conflict. Brent crude fell back from early-week highs near USD119 per barrel, expectations for central bank rate rises were scaled down, and the dollar traded mixed against G10 currencies. They said that if de-escalation becomes credible, the USD may return to a mild downward path as energy risks ease and conditions improve for non-US economies and global risk assets. They added that a weaker USD later in the year is possible if oil prices drop meaningfully in 2H26, but any fall may be limited by US growth and the dollar’s safe-haven demand. The Dollar Index (DXY) is now firm above 106, a level we last saw in October 2025, which means the initial plan for a steady dollar decline this year is off the table. The recent surge in oil prices has completely shifted our view, re-establishing the US Dollar’s strength. This is a direct result of the market seeking safety amid geopolitical tensions. The strong March jobs report, which added a robust 275,000 positions, confirms the US labor market is holding up well. With core inflation remaining stubbornly above 3.5%, the Federal Reserve is unlikely to consider cutting interest rates anytime soon. This higher-for-longer stance provides a solid foundation for the dollar in the coming weeks. For derivative traders, this environment of uncertainty suggests focusing on volatility. With Brent crude recently touching $119 a barrel, its highest point since the 2022 energy shocks, implied volatility in major currency pairs like EUR/USD will likely stay elevated. Using options strategies like straddles could be a way to trade the potential for large price swings, regardless of direction. We must watch for any credible signs of de-escalation, as sentiment can shift rapidly. We saw this last week when oil prices retreated from their peak to around $112 a barrel on mere hopes of a resolution, causing the dollar to trade mixed. A confirmed easing of tensions would likely cause a sharp, albeit perhaps temporary, reversal in the dollar’s strength. Even if oil prices fall later in the year, the dollar’s downside appears limited. The resilience of US growth, which consistently outperformed expectations throughout 2025, provides a strong economic backdrop. This suggests that selling out-of-the-money puts on the dollar could be a prudent strategy, as it benefits from both dollar strength and its limited potential to fall sharply.

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