The US Dollar has given back most of its gains linked to the Iran conflict, with the US Dollar Index (DXY) down 1.8% this month to 98.1. This is close to 97.6, the level seen before Operation Epic Fury began.
The DXY has surrendered more than 80% of its rise from the Iran conflict. The move comes as equities have stayed resilient and Brent crude has held mostly below $100 per barrel over the past week.
Markets have continued to price in the chance of a diplomatic outcome, following President Donald Trump’s 8 April temporary ceasefire. The first talks in Islamabad did not succeed.
After the US moved to blockade the Strait of Hormuz, EU nations and China increased efforts to push for diplomacy. The worst oil shock scenario is described as partly contained, even though the conflict has not ended.
The article notes that US allies have not backed steps that would widen the Middle East conflict into total war. It also states the piece was produced with the help of an AI tool and reviewed by an editor.
We saw this pattern clearly last year, in 2025, during the Iran conflict when the US dollar initially surged on news of Operation Epic Fury. The DXY index quickly gave back over 80% of those gains as America’s allies in Europe and Asia refused to support an escalation. This lesson in de-escalation is critical for our current strategies.
This playbook is repeating itself today amid rising US-China tensions in the South China Sea. The CBOE Volatility Index (VIX) spiked to 28 last week but has since retreated back below 19 as diplomatic channels are prioritized by regional partners. This suggests the market is pricing out the worst-case scenarios faster than in previous decades.
The initial flight to safety is becoming a shorter-term trade that offers an opportunity to fade. For example, the USD/JPY pair dropped to 145 on the initial naval posturing but has already rebounded to 151 after ASEAN called for an emergency G20 meeting to ensure trade routes remain open. We see the dollar’s strength is now capped not by a lack of conflict, but by a coordinated international pushback against it.
Likewise, oil markets are reflecting this reality. WTI crude futures briefly touched $95 per barrel but have since fallen back to near $88, as OPEC+ has given no indication it would curb production in the event of a localized dispute. This containment of energy prices prevents the kind of sustained inflation panic that would force a more aggressive central bank response and a stronger dollar.
Therefore, traders should consider selling US dollar strength that arises from these geopolitical shocks, especially against currencies of nations advocating for diplomacy. Selling out-of-the-money call options on the DXY or buying puts on volatility after the initial spike appear to be viable strategies. The pattern suggests these knee-jerk rallies in the dollar are proving to be temporary.
Looking back, this is a significant departure from the sustained uncertainty and dollar strength we witnessed during coalition-backed actions like the 2003 invasion of Iraq. The current multipolar world means US-led conflicts without broad allied support are less likely to cause prolonged market dislocations. This shift has created a recurring pattern of sharp but brief risk-off moves.
