The US Dollar rose on Thursday as risk-averse trading supported demand. The DXY moved back above 100.00 after earlier losses.
US President Donald Trump said his “important update” on Iran repeated recent warnings. He referred to “extremely hard” attacks and urged allies to “build up the courage” to secure the Strait of Hormuz.
Dollar Gains On Risk Aversion
Iranian President Masoud Pezeshkian sent an open letter to people in the US about whether the war fits the “America First” pledge. Israel and Iran continued exchanging missiles and drones, and Tehran called Washington’s peace terms “maximalist and irrational”.
US economic data on Wednesday supported the Dollar. ADP Employment Change showed a 62K net job rise in March versus 40K expected, and February was revised to 66K from 63K.
The ISM Manufacturing PMI rose to 52.7 from 52.4, above the 52.5 forecast and the highest since August 2022. Higher costs and softer employment components tempered the overall reading.
Attention turns to Friday’s Nonfarm Payrolls report. Markets expect 60K new jobs after a 92K fall in February, which may shape the Federal Reserve’s near-term approach.
Market Focus Shifts To Fed Policy
Looking back at this time in 2025, the market was driven by geopolitical fears surrounding Iran and a strong US dollar. Today, the landscape is entirely different as those specific tensions have eased, shifting our focus from risk sentiment to central bank policy. The Dollar Index (DXY), which was pushing above 100 then, now sits higher but for different reasons at 104.25, reflecting a divergence in global economic outlooks.
The Federal Reserve’s stance is now the primary driver for the dollar, a sharp contrast to last year’s focus on macro data strength. With the Fed funds rate holding at 4.50%, futures markets are currently pricing in a 70% chance of a rate cut by the June meeting, according to the CME FedWatch tool. This expectation of looser policy is creating a headwind for the dollar, suggesting traders should be positioned for potential weakness.
Upcoming economic data will either confirm or challenge this dovish outlook. We are watching this Friday’s Nonfarm Payrolls report closely, with consensus forecasts anticipating a moderate gain of 150,000 jobs, a slowdown from the post-pandemic hiring boom. The latest Consumer Price Index (CPI) reading of 2.8% shows inflation is cooling, giving the Fed room to consider easing monetary policy later this year.
This environment suggests a shift in volatility compared to the sharp, risk-driven moves we saw in 2025. Implied volatility in major pairs like EUR/USD has compressed from the highs seen during the 2022-2023 hiking cycle, making options selling strategies more appealing for collecting premium. A surprisingly strong jobs number, however, could quickly reintroduce volatility and challenge the prevailing narrative.
Given the expectation of a softening dollar, traders might consider buying call options on currencies expected to outperform, such as the Euro or Swiss Franc. Alternatively, for those anticipating a gradual dollar decline, selling out-of-the-money DXY call options could be a viable strategy. Using put options on the dollar can also serve as an effective hedge against any unexpected hawkish surprises from the Federal Reserve.
