The US dollar rose after an energy price shock linked to the Middle East conflict, but its rise has slowed in recent weeks. This has been linked to expectations that the conflict may end soon and the Strait of Hormuz could reopen quickly.
The dollar has also faced pressure from a higher US policy risk premium, tied to new uncertainty from the conflict, though this is hard to measure. In addition, short-term yield spreads have moved sharply against the US dollar over the past month.
Dollar Momentum And Market Drivers
Federal Reserve officials have indicated that interest rates may remain on hold for now. Markets are currently undecided on whether the next policy move will be a rate cut or a rate rise.
The article was produced using an artificial intelligence tool and reviewed by an editor.
We remember how the dollar lost its upward momentum back in late 2025, even with the energy shock from the Middle East. That was due to hopes the conflict would end, a higher US policy risk, and yield spreads turning against the dollar. This old indecisiveness now sets the stage for our trading in the coming weeks of April 2026.
That uncertainty from 2025 has carried over, making directional bets on the dollar risky. Implied volatility on three-month currency options has climbed nearly 12% in the last quarter, suggesting the market expects swings but no clear trend. This environment is ideal for purchasing volatility through strategies like straddles or strangles on major pairs like USD/JPY, especially ahead of key data releases.
Options Strategies For A Rangebound Dollar
The yield spread situation has also continued to move against the dollar. The difference between US 2-year Treasury yields and German 2-year bund yields has tightened by another 20 basis points since January 2026. This makes it attractive to look at selling USD call options against the Euro, betting that the interest rate differential will cap the dollar’s upside.
The Federal Reserve’s stance remains a primary driver of this uncertainty. While markets were split on a hike or a cut last year, the stronger-than-expected March 2026 jobs report has shifted sentiment again. The CME FedWatch Tool now shows the market is pricing in a 45% chance of a rate hike by July, creating tension that will cause sharp moves on inflation data.
Given these factors, we see the US Dollar Index (DXY) staying stuck in a defined range, much like it has for most of this year between 103.50 and 105.00. Selling options with strike prices outside of this range, such as iron condors, could be a prudent way to collect premium from the market’s lack of a clear direction. Expect this sideways price action to continue until we get a more decisive signal from either the Fed or global risk events.
