Energy markets experienced a sharp reaction to eased US-Iran tensions, causing a 5% drop in Brent crude. This reflects caution amid geopolitical shifts, with concerns of policy reversals.
De-Dollarization Discussions
The Federal Reserve is not hurrying to cut rates, but there is growing discussion on de-dollarization. US Treasury TIC data may reveal foreign portfolio adjustments, showing activity in the de-dollarization debate.
The Fed’s Beige Book indicates no urgent need for rate cuts, with activity stable or rising in eight of twelve districts. There are no signs of labour market decline, impacting expectations on rate cuts.
The release of the Beige Book and Treasury data may influence foreign asset decisions, especially regarding Chinese holdings. The potential removal of a second rate cut this year could be beneficial for the dollar.
The sharp 5% drop in Brent crude following a pullback in US-Iran tensions highlights extreme sensitivity in the energy markets. Recent data from the Energy Information Administration showed an unexpected build in U.S. crude inventories this week, adding to the downward pressure. This environment suggests that trading volatility using options on energy ETFs will likely be a key strategy in the weeks ahead.
Federal Reserve Hold
Given the recent Beige Book report, we believe the Federal Reserve will remain on hold, which should support the dollar in the near term. The CME FedWatch Tool now indicates a less than 15% probability of a rate cut before the fourth quarter, a significant shift from the 40% chance priced in just last month. Consequently, derivative traders may find value in strategies that benefit from stable-to-higher interest rates, such as selling out-of-the-money calls on Treasury note futures.
However, the longer-term de-dollarization theme is gaining traction, especially with ongoing political pressure on the Fed. The latest Treasury International Capital (TIC) data confirmed that foreign central banks were net sellers of $55 billion in Treasuries in November of 2025, with China’s holdings dropping to a new 14-year low. This supports considering longer-dated put options on the dollar as a strategic hedge against this slow-moving trend.
This creates a conflict between the dollar’s short-term strength and its potential long-term weakness, a situation we last saw in the mid-2000s before a multi-year dollar decline. Traders should therefore watch for signs of divergence between short-term rate expectations and official sector selling of U.S. assets. This suggests a cautious approach, perhaps favoring shorter-term bullish dollar positions while using any strength to build longer-term bearish hedges.
