ING said the US Dollar eased for a short time after Iranian authorities reported the Strait of Hormuz was “fully open”. It said an end to the crisis could place the US Dollar Index (DXY) near 97.50/98.00 and EUR/USD just over 1.18.
ING economists expect the Dollar to stay close to those levels this quarter. They see DXY more likely trading around 98.00/98.50 as expectations for Federal Reserve (Fed) easing weaken.
The report said uncertainty around peace talks keeps attention on when energy flows fully restart. It also said high oil prices may feed into other parts of the economy.
It referenced a speech by Fed Governor Christopher Waller released on Friday before the Fed blackout period, titled “One Transitory Shock After Another”. It noted Waller voted for a cut in January.
The report said Waller warned that prolonged high energy prices could add to tariff effects and affect inflation expectations. It said he focused on 5–10 year US inflation expectations from the 5Y5Y inflation swap.
It said a move to 2.70/2.80%, as seen in early 2022, could end hopes of Fed easing this year. The article stated it was created with an AI tool and reviewed by an editor.
We can see how the dollar’s trajectory shifted from the analysis we saw last year. The hope was that a resolution in the Strait of Hormuz would push the DXY down toward 97.50, but persistent geopolitical tensions and sticky inflation have done the opposite. With the US Dollar Index currently trading around 104.50, those earlier expectations for a benign dollar decline have been completely shelved.
The concerns about inflation expectations becoming de-anchored have proven correct, and this remains the key focus. The latest March Consumer Price Index data showed a year-over-year increase of 3.6%, and the 5-year, 5-year forward inflation expectation rate is now at 2.65%. This is dangerously close to the 2.70% level that was flagged back in 2025 as a line in the sand for any potential Fed easing.
For derivatives traders, this suggests that implied volatility on the dollar may be overpriced, especially for near-term options. With the Fed firmly on hold, selling short-dated USD calls or even strangles against major currencies could be a viable strategy to collect premium. The market has now priced out any rate cuts for the next two quarters, creating a more stable range-bound environment for the dollar at these elevated levels.
The primary risk to this strong-dollar view remains a sudden and unexpected geopolitical de-escalation, specifically a lasting peace deal impacting the Strait of Hormuz. Such an event could trigger a rapid unwind of safe-haven dollar positions, potentially causing a sharp drop back towards the 100.00 level in the DXY. Traders should therefore hedge any large short-volatility positions with out-of-the-money puts on the dollar index.
Looking at EUR/USD, the pair is struggling around 1.0750, a far cry from the 1.18 level envisioned during the brief moment of optimism last year. This weakness is compounded by signs the European Central Bank may be forced to consider rate cuts sooner than the Fed, creating a policy divergence that favors the dollar. We see this as a continued headwind for the euro in the coming weeks.
