The US Dollar Index (DXY) traded near 100.00 in early European hours on Friday. It stayed firm as markets tracked renewed concerns about an extended Middle East conflict.
On Thursday, US President Donald Trump said the war’s main objectives were “nearing completion” and could end in two to three weeks. He also said he would bomb Iran “back to the Stone Age” if it did not accept an unconditional surrender.
Middle East Tensions Support The Dollar
Iran’s foreign minister, Abbas Araghchi, said the attack would not force Tehran to surrender. A longer US–Iran conflict can increase demand for safe-haven currencies, including the US Dollar.
The dollar’s rise may be limited by US tariff threats. Bloomberg reported that Trump signed an executive order that could impose up to 100% tariffs on certain imported medicines from companies that do not reach deals with his administration in the coming months.
Markets were also waiting for the US March jobs report due later on Friday. Forecasts point to 60,000 job gains and an Unemployment Rate of 4.4%, with weaker results likely to pressure the USD.
The US Dollar is the world’s most traded currency, making up over 88% of global foreign exchange turnover, or about $6.6 trillion per day in 2022. The Federal Reserve guides its value via interest rates, with a 2% inflation target, and can also use quantitative easing or tightening.
Geopolitics Versus Economic Data
With the US Dollar Index sitting at the critical 100.00 level, we are facing a classic tug-of-war between geopolitics and economic data. The escalating conflict in the Middle East is driving safe-haven demand for the dollar, while looming tariff threats and a potentially weak jobs report are capping the upside. This high level of uncertainty suggests that volatility will be the main theme in the coming weeks.
The threat of a prolonged conflict with Iran is a significant bullish factor for the dollar. We saw a similar dynamic in early 2022, when geopolitical tensions caused the DXY to rally from 96 to over 103 in less than three months as capital fled to safety. Given the direct threats being exchanged, derivative traders should consider buying out-of-the-money call options to protect against a sudden, sharp appreciation of the dollar if the situation deteriorates further.
On the other hand, the upcoming jobs report presents a major risk to the dollar’s strength. The market is forecasting only 60,000 new jobs, a stark drop from the average monthly gain of over 225,000 that we observed throughout 2023. A number this low, or worse, could signal a sharp economic slowdown and prompt traders to sell the dollar, making put options an attractive hedge against a negative surprise.
Adding to the uncertainty are the new tariff threats on imported medicines. We remember well the market turbulence during the 2018-2019 trade disputes, where the CBOE Volatility Index (VIX) repeatedly spiked above 20 on tariff announcements. This history suggests that any new trade restrictions could inject significant, unpredictable swings into currency markets.
Given these powerful but opposing forces, taking a direct long or short position on the dollar is extremely risky right now. A more prudent strategy for the coming weeks is to trade the expected rise in volatility itself. This could involve using options strategies like a long straddle, where a trader buys both a call and a put option, profiting from a large price move in either direction.
The immediate focus will be the jobs report later today, which will set the market’s tone heading into next week. If the data comes in strong, it could give the dollar momentum to break higher, especially with geopolitical tailwinds. However, a weak report will put the focus back on economic health, likely sending the dollar lower despite the tensions abroad.
