The US Dollar Index (DXY), which tracks the US Dollar against six major currencies, steadied after modest gains and traded near 98.40 during Asian hours on Wednesday. It was reported around 98.50 as the session progressed.
The move followed a report that President Donald Trump will extend the US-Iran ceasefire until talks show progress. Earlier the same day, he said, “I expect to be bombing” if Iran did not meet his demands, and said the military was “raring to go.”
Uncertainty over the talks remains. The US blockade on Iranian vessels continues, and a planned second round of negotiations did not go ahead.
Reports said Vice President JD Vance cancelled a planned visit to Islamabad after Tehran informed Washington via Pakistan it would not attend. Iran’s military warned of a powerful attack on predetermined targets following repeated threats from Trump.
The US Dollar also took support from US Retail Sales data published on Tuesday. Retail Sales rose 1.7% month-on-month in March versus 0.7% in February, above the 1.4% forecast.
The February gain was revised from 0.6% to 0.7%. Year-on-year Retail Sales increased 4.0% in March, the same as February.
Looking back to this time in 2025, we were watching the US Dollar Index hover near a strong 98.50, propped up by geopolitical tensions and robust retail sales figures. The ceasefire with Iran was the main story, creating day-to-day uncertainty that kept safe-haven demand for the dollar high. The market was pricing in risk from a potential conflict, which overshadowed underlying economic shifts.
The situation today is quite different, with the dollar now trading closer to 96.00 as of this week. While the US-Iran diplomatic channels have stabilized, the economic landscape has softened considerably, with Q1 2026 GDP growth coming in at a revised 0.8% and recent inflation data showing a cooling trend. This contrasts sharply with the strong 1.7% monthly retail sales growth we saw in March of 2025.
This shift suggests that implied volatility on currency pairs like EUR/USD is lower now than during the geopolitical flare-ups of 2025. We believe traders should consider buying options, such as straddles, ahead of next week’s inflation data release, as a drop in volatility has made these strategies cheaper. A downside surprise in the data could significantly weaken the dollar, and these positions would capitalize on the resulting price swing.
With the market now pricing in a greater than 60% chance of a Federal Reserve rate cut by the third quarter, futures traders should be positioned for further dollar weakness. We are seeing increased open interest in short US Dollar Index futures contracts. A break below the key 95.80 support level could trigger a new wave of selling.
Given the calmer geopolitical front, the primary risk is now economic. Hedging long dollar positions with out-of-the-money puts on the DXY offers a cost-effective way to protect against a sharper-than-expected economic slowdown. This is a reversal of last year’s strategy, where a primary hedge was against a sudden military escalation.
