A two-week ceasefire between the US, Israel and Iran has been linked to renewed weakness in the US Dollar. The move has coincided with improved risk sentiment and a fall in Brent Oil.
MUFG said the ceasefire reduces, in the short term, the risk of a major risk-off move that would normally support the Dollar. It added that the outcome is negative for the Dollar and may lead to further near-term losses if talks continue.
Ceasefire Impact On Dollar And Oil
The note stated that the Dollar had underperformed during the conflict compared with what would be expected given higher energy prices. It also said markets are likely to stay sensitive to incoming news on negotiation progress.
It outlined possible reversal moves in G10 currencies following the ceasefire news. It suggested SEK and NZD could do well, while NOK and GBP could lag, as NOK and GBP were the two top performers since the conflict began.
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We are seeing renewed market jitters that mirror the tensions we experienced before the ceasefire of 2025. With Brent crude recently touching $95 a barrel and the Dollar Index (DXY) firming above 106.5, the market is pricing in a significant risk premium. This environment makes the US dollar a temporary safe haven, much like it was during the early stages of that past conflict.
Options Positioning For A Potential Dollar Reversal
Looking back at the events of 2025, we remember how the two-week ceasefire agreement caused a sharp reversal. Oil prices fell back below $80 and risk sentiment improved dramatically, leading to a rapid decline in the dollar. The lesson is that any credible news of de-escalation can unwind these safe-haven trades very quickly.
For derivative traders, this means positioning for a potential sharp drop in the dollar if negotiations progress. Buying short-dated put options on the dollar index or related ETFs provides a low-cost way to profit from a sudden dovish turn in sentiment. The high uncertainty makes options a better tool than outright short positions for managing risk.
This situation also reinforces the divergence in monetary policy we’ve been watching. A fall in energy prices would cool inflation more significantly in Europe, where recent CPI still hovers around 3.1%, than in the US. This could give the European Central Bank more breathing room and strengthen the euro against the dollar.
We should also anticipate reversal trades in G10 currency pairs, just as we saw in 2025. The Norwegian krone (NOK) has been strong due to high oil prices, while the Swedish krona (SEK) and New Zealand dollar (NZD) have suffered from the risk-off mood. Derivative strategies that bet on SEK or NZD strength against the NOK could perform well in the coming weeks if tensions ease.
This playbook is not new; we saw a similar dynamic during the onset of the conflict in Ukraine back in 2022. The DXY rallied from around 96 to over 103 in a matter of months as the crisis unfolded, showing how geopolitical risk directly translates into dollar strength. Any unwinding of that risk should logically have the opposite effect.
