The US Dollar Index recovered part of its earlier fall and traded near 97.40 in European hours on Monday. At the time of reporting, it was down 0.2% at about 97.60 against six major currencies.
Earlier selling followed a US Supreme Court ruling against President Donald Trump’s tariff policy. The court said the tariffs were illegal because they relied on the International Emergency Economic Powers Act (IEEPA).
Dollar Volatility Outlook
After the ruling, Trump announced a 15% rise in import duty worldwide. The move was framed as a response to the court’s decision on his tariff plan.
US data also weighed on the dollar, with weaker growth and softer business surveys. Q4 GDP rose 1.4% year-on-year, below estimates of 3% and the prior 4.4%.
The S&P Global Composite PMI for February came in at 52.3, down from 53.0 in January. Both manufacturing and services recorded moderate growth.
Attention now turns to speeches from several Federal Reserve officials this week. These comments may offer clues on the US interest rate outlook.
Options Hedging Strategies
Looking back at the policy whiplash from 2025, the key takeaway was the surge in volatility following the Supreme Court’s tariff ruling and the subsequent reaction. This suggests that in the coming weeks, buying options to protect against sharp swings in the dollar is a prudent move. With the CBOE Volatility Index (VIX) currently hovering around a relatively low 14, options pricing is not overly expensive, offering a cost-effective hedge against unexpected political or economic news.
The contradictory forces of policy uncertainty and a potential global trade slowdown make a clear directional bet on the dollar risky. Last year’s events showed us how quickly the dollar’s direction can reverse, moving from weakness on the court ruling to strength on the tariff threat. Therefore, we should consider using straddles or strangles on major currency pairs like EUR/USD, which profit from a large price move in either direction without needing to predict the specific outcome.
The weak economic data from that period in 2025, such as the 1.4% GDP growth, was a significant warning sign of a slowing economy. We must view today’s data through that lens, especially as the most recent January 2026 inflation report showed Core PCE holding at a stubborn 2.8%. This persistence of inflation ties the Federal Reserve’s hands, making it less likely to cut interest rates even if growth falters.
Given this backdrop, we anticipate the Fed will remain cautious in its upcoming speeches, creating uncertainty for interest rate derivatives. The market is pricing in a divergence between economic data and potential political shocks, which is reflected in the skewed volatility surface for SOFR futures. Traders should be wary of taking on large, unhedged positions tied to the Fed’s rate path until we get more clarity.
