Hedge Funds Feed Dollar Gains as US, Iran Exchange Threats

The dollar advanced and traders bet on further gains for the reserve currency as the war in the Middle East entered its fourth week and the US exchanged threats with Iran.

The Bloomberg Dollar Spot Index added 0.3% in early London trading. It has jumped 2.2% since the start of the war as surging energy prices support the oil-exporting US economy and investors rush to safe-haven assets. The greenback is just shy of a fresh year-to-date high and options traders see more gains, with one-month sentiment the most bullish since 2022.

The currency climbed versus Group-of-10 peers after US President Donald Trump gave Iran an ultimatum to reopen the Strait of Hormuz or have its power plants bombed. Tehran countered that it would close the Strait of Hormuz “completely,” and higher oil prices supported the greenback once again.

“In real terms, the US economy is still looking better insulated against the energy shock, which we expect to support the USD over coming weeks,” said Jens Naervig Pedersen , a senior analyst at Danske Bank.

Hedge funds that bought the dollar on Friday are coming back now for more, according to currency traders familiar with the transactions who asked not to be identified because they aren’t authorized to speak publicly. Although spot and options volumes run below recent averages, it’s clear that leveraged investors are seeking to position for further dollar gains.

Risk reversals, which measure how expensive it is to buy versus sell a currency in the options market, point the same way, with the premium for dollar gains widening on Monday. Demand has also surged for protection against abrupt moves in the greenback.

US-Iran Tensions Escalate With War Entering Fourth Week: TOPLive

An analysis of options flows reported to the Depository Trust & Clearing Corporation confirms the bias. Dollar-bullish positioning was consistent against the euro and the pound last week, with nearly 60% of the trades in favor of a stronger greenback. That trend continued across every trading day last week and has carried into Monday.