Renewed tension around the Strait of Hormuz lifted Brent crude by nearly $10 from Friday’s low of $86 a barrel and weakened global risk assets. The US Dollar was slightly firmer.
Market moves followed reports of renewed blockade concerns, with the US Navy seizing an Iranian ship in the Gulf of Oman and Iran stating it would retaliate soon. The energy shock was described as not necessarily over, but with the worst likely already passed.
The US Dollar Index (DXY) was expected to remain within its nearly one-year 96.00–100.00 range. Interest rate differentials between the US and other major economies were cited as a factor supporting that range.
The Wall Street Journal reported that the United Arab Emirates is exploring a currency swap line with the US Federal Reserve or the US Treasury. The aim was described as hedging against a more severe economic shock linked to the Iran war.
The article said it was created with AI assistance and reviewed by an editor. It was attributed to the FXStreet Insights Team, which selects and publishes market observations from experts and analysts.
Looking back at the analysis from last year, the view was that the US Dollar Index (DXY) would stay within a 96.00-100.00 range despite the energy shock. While that held through much of 2025, the market dynamic has clearly changed. The dollar has since broken decisively above that range, forcing us to re-evaluate our positions.
The primary driver has been the persistence of interest rate differentials, a factor noted last year but one that has since become more pronounced. While the Federal Reserve has held rates steady in the face of stubborn inflation data through early 2026, other central banks like the ECB have signaled a more dovish path. The Fed funds rate remaining above 5% while European rates are falling has made holding dollars too attractive to ignore.
This changes the calculus for derivative traders who may have been selling volatility based on the old range-bound expectations. With the DXY now trading near 104.75, strategies should shift towards buying dips or using options to position for further upside. The period of low volatility in the dollar that we saw last year appears to be over for now.
The energy shock from the Strait of Hormuz in 2025 did eventually de-escalate as cooler heads prevailed, proving that the worst of that specific crisis was indeed contained. However, Brent crude has found a new floor, holding consistently above $90 per barrel throughout this year due to resilient global demand and tighter supply discipline from producers. This persistent price level continues to feed into global inflation concerns and supports the Fed’s hawkish stance.
The dollar’s dominant role, which we saw underscored last year when the UAE explored a Fed swap line, has only become more entrenched in the current environment. Global uncertainty continues to fuel a flight to safety, benefiting the dollar as the world’s primary reserve currency. For the coming weeks, we should consider using call spreads on the DXY to position for a potential test of the 106.00 level last seen in late 2024.
