Societe Generale’s Kit Juckes refers to Robin Brooks’ analysis comparing the US dollar against other G10 currencies with the 2y/2y forward rate differential. The chart suggests the dollar is overvalued versus interest rate gaps, and Brooks expects a ceasefire.
Brooks says a ceasefire would trigger fast repricing in two areas. He expects oil futures to fall and the dollar to drop as safe-haven demand eases, while pointing to the risk of Fed rate cuts alongside rising inflation.
Dollar Valuation Versus Rate Differentials
Juckes notes that markets price Fed Funds unchanged for the rest of this year. By contrast, the ECB is priced to raise rates by 70bp, and the market expects hikes from all G10 central banks except the Fed.
He adds that Sweden is the only G10 economy forecast to have stronger growth than the US this year. He says the dollar could fall if the Fed eases policy while inflation rises and fiscal policy remains accommodative.
Societe Generale’s base case is unchanged Fed rates all year, which would support a range-bound dollar. Positioning is long USD, also long AUD and short JPY; the EUR long fell from 180 thousand contracts to 507.
We see a significant disconnect where the dollar appears overvalued relative to G10 interest rate differentials. A potential ceasefire in the ongoing Strait of Hormuz conflict is the key event to watch, as it could trigger a sharp fall in oil and the dollar. This is because the safe-haven demand that propped up the dollar during the crisis of late 2025 would quickly unwind.
Hedging Strategies For A Ceasefire Scenario
The market has fully priced in a flat Fed funds rate for the remainder of 2026, a view reinforced by the cautious tone in the March FOMC minutes. In contrast, ECB President Lagarde’s comments last week on “sticky” core inflation have cemented expectations for at least two more hikes, pushing the total expected tightening toward 70 basis points this year. This policy divergence is creating significant tension for currency pairs like EUR/USD.
Complicating the Fed’s dovish stance, last week’s Q1 advance GDP estimate came in stronger than expected at 2.4%, outpacing most G10 forecasts. However, the most recent CPI data for March showed a slight re-acceleration to 3.1%, making a potential rate cut politically difficult. This scenario of strong growth and stubborn inflation supports the view of a dollar stuck in a range for now.
Given the risk of a sharp repricing, we should consider buying cheap, out-of-the-money put options on the US Dollar Index (DXY) with tenors of one to three months. This provides a low-cost hedge against the ceasefire scenario without taking a direct bearish view on the dollar in a range-bound market. Implied volatility is currently moderate, making these options relatively affordable compared to what we saw in the fourth quarter of 2025.
The market is net long the dollar, though the latest CFTC data shows this is not an extreme position, suggesting there is still room for a squeeze on any dovish surprise. The significant reduction in EUR/USD long positions, from over 180,000 contracts in early 2025 to almost flat now, indicates much of the optimism has been priced out. We should be cautious about the crowded short JPY trade, as it is particularly vulnerable to a reversal in safe-haven flows.
