HSBC said the US dollar is being pulled in competing directions by Middle East tensions, shifting US trade policy and the 16–17 June Federal Open Market Committee meeting under new Federal Reserve Chair Kevin Warsh. The bank expects a softer broad USD over the longer term, but cautioned that any renewed signal of Fed rate rises could lend support to the currency. Past episodes of escalating regional stress have typically coincided with higher oil prices and a firmer dollar, while periods of easing have tended to reverse both moves. With no clear timeline for resolution and ongoing commodity supply disruptions, geopolitics remains a near-term driver.
US trade policy has returned to the fore following a 2 June announcement from the Office of the United States Trade Representative. The proposal sets out tariffs of 10–12.5% on imports from 60 economies under investigation over alleged forced labour linked to import controls, while also providing exemptions for USMCA-compliant goods; further carve-outs may follow once the public consultation closes on 7 July. Separately, markets have become more sensitive to hawkish repricing after upside surprises in US activity data, echoing late 2024 when a rapid shift in Fed expectations coincided with broad-based dollar strength.
Multiple Forces Driving Dollar Volatility
We see the US Dollar at a critical juncture, with several forces pulling it in different directions. Geopolitical tensions in the Middle East are causing volatility in oil prices, which directly impacts the dollar’s strength. Brent crude has been hovering around $92 per barrel, and any escalation could push both oil and the dollar higher.
New US trade policy is also creating uncertainty for currency markets. The proposed tariffs on goods from 60 countries, set to be finalized after July 7, could disrupt trade flows and favor the dollar as a safe haven. This makes pairs involving emerging market currencies particularly vulnerable to sudden shifts in sentiment.
Fed Policy and Market Positioning
The primary focus, however, is the upcoming Federal Reserve meeting on June 16-17. Recent economic data, such as the surprisingly strong May jobs report showing 265,000 new jobs and a Core PCE inflation reading that remains sticky at 3.0%, puts pressure on the new Fed Chair to sound hawkish. This has pushed the market-implied probability of a September rate hike to over 35%, a significant jump from just a month ago.
This situation feels similar to late 2024, when a hawkish repricing of Fed expectations led to a sharp, broad-based rally in the US dollar. Given the current economic strength, we believe the risk of a hawkish surprise from the Fed is underpriced. Consequently, we are considering short-dated call options on the Dollar Index (DXY) as a way to position for a potential spike.
While our base case for the longer term is a weaker dollar, the immediate risks are clearly skewed to the upside. The elevated volatility, with the CVIX index for currencies climbing over the past few weeks, suggests that holding options strategies that benefit from a sharp move is a prudent approach. This allows for participation in a potential dollar rally while maintaining a defined risk profile.
