The US Dollar has fallen back after earlier gains, with the US Dollar Index (DXY) moving towards 98.000. The move comes as markets expect further de-escalation in the Middle East conflict.
There have been recent incidents, including Iran firing on vessels in the Strait of Hormuz and the US taking over an Iranian ship. Despite this, market expectations still point to easing tensions, which is limiting the Dollar’s upside.
Bloomberg reported there is a good chance of a deal within the next few days that could end the war. The report also said more talks may still be needed on nuclear and military issues, according to officials.
With the Dollar already trading close to levels seen before the late February conflict, a deal may not cause another sharp sell-off. Markets are also watching how quickly traffic through the Strait of Hormuz returns to normal to reduce global energy supply restrictions.
The piece was produced using an AI tool and reviewed by an editor. It was compiled by the FXStreet Insights Team.
We can see how the US dollar reacted to the Middle East tensions in early 2025, where the DXY index quickly gave back its gains as de-escalation was priced in. That event taught us that the dollar’s safe-haven rallies on geopolitical news can be very short-lived if a diplomatic path remains open. The DXY’s return to the 98.00 level back then showed how quickly the market moves on from such events once the immediate threat to energy supplies fades.
Today, the situation is different, with the dollar index trading much stronger near 105.50, driven more by interest rate differentials than by safe-haven demand. Looking back, the normalization of shipping traffic through the Strait of Hormuz that followed the 2025 agreement was swift, and that pattern should inform our current thinking. We see this reflected in current data, with maritime reports from March 2026 showing shipping volumes through the strait are actually up 4% year-over-year, indicating full confidence in the stability of the region.
This suggests that buying dollar call options purely as a hedge against new geopolitical flare-ups may not be the most effective strategy, as the premium can evaporate quickly. The lesson from last year is that the market sells the rumor of peace even faster than it buys the rumor of war. Given this, traders might consider selling short-dated dollar volatility when tensions rise, anticipating a quick return to the mean.
WTI crude oil prices have also shown this pattern, having stabilized in a narrow range around $85 per barrel for most of this year, a stark contrast to the sharp spike we saw during the 2025 incident. This stability in the energy market further reduces the dollar’s appeal as a primary geopolitical hedge. Therefore, derivative plays should focus more on economic data releases that influence Federal Reserve policy rather than headlines from the Middle East.
With the VIX index currently subdued around 14, implied volatility on currency options is relatively low compared to the peaks of last year. This environment makes it cheaper to position for longer-term trends instead of reacting to short-term news. We should use options to position for shifts in interest rate expectations, as that is the primary driver of the dollar’s valuation in the current climate.
