Renewed Middle East tensions and firmer oil prices have coincided with a stronger US Dollar and higher global bond yields. OCBC projects the USD will gain 2–3% in 2H26 against lower-yielding currencies such as the euro, Japanese yen and Swiss franc, while framing a broader advance as conditional on energy and macro triggers rather than baseline expectations. A move of over 5% is presented as a tail risk that would need either oil above USD100 per barrel or evidence of US economic overheating, including falling unemployment and firmer medium-term inflation expectations.
Brent crude at around USD78 per barrel is described as below the level that would challenge the view that the prior quarter’s energy shock is fading, although further rises are flagged as a potential catalyst for wider USD strength. Separately, the latest FOMC minutes are characterised as containing few surprises and aligning with a hawkish post-meeting tone, with the main takeaway being a shift towards scenario-based policy outlooks.
USD Outlook and Drivers
We expect the US Dollar to strengthen by 2-3% during the second half of 2026, especially against the Euro and Japanese Yen. This outlook is driven by building geopolitical risks in the Middle East that are pushing energy prices higher. Brent crude futures have already climbed to $81 a barrel this week, showing this trend is underway.
To position for this, we are looking at buying call options on the US Dollar Index (DXY) with expirations in late Q3. This strategy provides a defined-risk way to capture the anticipated move. We are also considering futures positions that are short the EUR/USD pair, as interest rate differentials favor the dollar.
Tail Risks, Data Support, and Historical Parallels
There is a smaller chance of a much larger dollar rally of over 5%, which would likely happen if oil prices were to surge above $100 a barrel. For this scenario, we are layering in some cheap, out-of-the-money call options as a tail-risk hedge. This provides significant upside potential for a relatively small initial cost.
This view is supported by recent data showing the US economy remains robust, keeping the Federal Reserve on a hawkish footing. Last week’s Non-Farm Payrolls report showed the addition of 215,000 jobs, while the University of Michigan’s survey showed 5-year inflation expectations ticking up to 3.1%. The US 10-year Treasury yield has also pushed back above 4.50%, further enhancing the dollar’s appeal.
We have seen this dynamic before, particularly in early 2022 when the combination of an energy shock and a hawkish Fed led to a significant dollar rally. The current environment mirrors that setup, suggesting a path of further strength for the currency. This makes long dollar positions attractive against currencies where the central bank is less inclined to tighten policy.
