The US Dollar index gave up an early-week rebound and moved back towards levels seen before the Middle East conflict. Optimism rose about further US–Iran talks and a move towards de-escalation.
The US Dollar and Japanese Yen lagged, while Scandinavian and commodity-linked currencies performed best among G10 this month. The Norwegian krone and Swedish krona led gains, followed by the New Zealand and Australian dollars.
Oil fell back below USD100 per barrel, and global equity markets moved closer to record highs. The Dollar did not extend gains despite the earlier energy price rise, adding downside risk to MUFG’s updated Dollar forecasts.
The item was produced using an AI tool and reviewed by an editor. It was published via the FXStreet Insights Team, which selects market observations and adds input from internal and external analysts.
We recall that the dollar’s failure to hold its gains during the Middle East de-escalation in 2025 was a significant bearish signal. That event confirmed a shift toward risk-on sentiment, punishing safe-haven currencies. This pattern of the dollar failing to sustain rallies on geopolitical news has since become more established.
The commodity currencies that strengthened last year, like the Australian dollar, have seen their momentum slow in the first quarter of 2026. We saw the AUD/USD pair struggle to break past the 0.6900 level as Australia’s most recent CPI data showed inflation cooling to 3.4%. This suggests that the easy gains from the risk-on recovery of 2025 are likely behind us.
The US Dollar index has since stabilized, trading in a narrow range and is currently holding near 104.5. The Federal Reserve’s decision in March 2026 to hold rates steady, citing sticky services inflation, has put a floor under the dollar for now. This price action suggests a period of consolidation, which is often ideal for options sellers.
Given this stability, derivative traders could look to sell volatility, especially in major currency pairs. For example, structuring short straddles or strangles in EUR/USD could be a viable strategy to collect premium while the market digests the Fed’s next move. We believe implied volatility in major pairs does not fully reflect this new holding pattern.
However, we also note that the Japanese Yen has remained weak, continuing its underperformance from 2025. This makes currency pairs like AUD/JPY sensitive to any sudden shifts back to risk-off sentiment. Traders could consider buying cheap, out-of-the-money put options on this pair as a low-cost hedge against unforeseen global shocks.
The CBOE Volatility Index, or VIX, has ticked up from its recent lows of 13 to around 15, but remains historically subdued. This environment may present a tactical opportunity to buy protective put options on equity indices at a reasonable cost. Such positions would shield portfolios if the current market calm is disrupted by surprising inflation data in the coming weeks.
