The Euro fell against the US Dollar on Wednesday as tensions in the Strait of Hormuz continued, despite a US-Iran ceasefire extension. EUR/USD traded near 1.1712, down for a second day, while the US Dollar Index was around 98.57, close to a one-week high.
Iran’s Islamic Revolutionary Guard Corps reported seizing two ships in the Strait of Hormuz, according to Iranian media. The UK Maritime Trade Operations also reported earlier that two vessels and a third ship came under attack in the waterway.
The US naval blockade stayed in place after President Donald Trump extended the ceasefire shortly before it was due to expire. Trump said talks could happen as soon as Friday, while Iran’s Tasnim News Agency said Tehran has not decided whether to take part.
Oil prices stayed elevated, keeping inflation risks in view and affecting rate expectations for the Fed and the ECB. In the Eurozone, preliminary Consumer Confidence for April fell to -20.6 from -16.3, the lowest level in over three years.
The US data calendar was largely empty on Wednesday, leaving markets focused on geopolitical developments.
Looking back at the situation in April 2025, we saw the EUR/USD pair trading around 1.17 as tensions in the Strait of Hormuz drove safe-haven flows into the US dollar. The market was anticipating that the Federal Reserve would keep interest rates higher for longer, while only pricing in the possibility of European Central Bank hikes. This set the stage for a divergence that would define the next year.
Today, that divergence is a reality, and traders need to act accordingly. The US Dollar Index has climbed from around 98.5 to over 105.80, with EUR/USD now struggling to hold 1.0730. The Fed Funds Rate sits at 5.50% while the ECB’s deposit rate is at 4.00%, creating a significant interest rate differential that favors holding dollars.
While the specific Hormuz tensions from last year have eased, the geopolitical landscape remains uncertain, now with a focus on conflicts in Eastern Europe and trade disputes in the South China Sea. This environment continues to support the dollar’s role as the world’s primary reserve currency during times of stress. These ongoing risks mean that unexpected news can cause sharp currency movements.
Given this backdrop, implied volatility in currency markets remains elevated. We believe traders should consider strategies that benefit from this, such as buying EUR/USD put options to protect against further downside driven by weak European growth. Alternatively, range-bound strategies like short strangles could be profitable if central banks signal a prolonged pause on rate changes.
The weak Eurozone Consumer Confidence of -20.6 we saw in 2025 has only marginally improved to -14.9 as of last month, pointing to persistent economic fragility. With recent US inflation still firm at 3.5% and Eurozone inflation lower at 2.4%, the interest rate gap is unlikely to close soon. Therefore, using forward contracts to sell the Euro against the Dollar for delivery in three to six months remains a compelling strategy to capitalize on the carry trade.
