Everyone is positioned for a weaker dollar and is talking about inflation, twin deficits, and long-term USD decline. But markets don’t move on long-term narratives always, rather sometimes they move on liquidity stress.
And right now, we’re entering a regime where USD demand can spike aggressively in the short term.
The key driver: Global USD shortage
With escalation in the Middle East and disruptions around key shipping routes (Hormuz, Bab el-Mandeb), we’re likely entering the worst commodity shock regime in decades.
1)Energy prices surge → oil, LNG, freight explode
2)Energy trade is priced and settled in USD
3)Importers (Europe, Asia) must secure dollars at any cost
This creates a mechanical USD bid, regardless of macro narratives. That may lead to margin calls = forced USD buying, and increased hedging FX exposure. This is where things go nonlinear.
1)Energy price spikes → huge P&L stress across hedging books
2)Utilities, traders, corporates face margin calls
3)These are overwhelmingly USD-denominated
Result: forced USD buying into strength
Europe & Asia: Structural vulnerability
-Europe = energy importer, already fragile
-Asia (Japan, Korea, India) = even more exposed
-If Middle East flows are disrupted → scramble for supply
Who fills the gap?
The US (LNG + energy exports)
Which implies:
More USD needed for trade settlement
More USD needed for collateral
But this isn’t just short-term — 3 macro forces reinforce it
Even beyond the immediate funding squeeze, there are structural forces that can amplify USD strength:
1) USD = global reserve & funding currency
In stress regimes, everything converges to one reality:
the world is structurally short USD
Trade, debt, collateral → all USD-based
In volatility → global demand for USD spikes
Liquidity stress = USD strength
2) Europe’s energy problem
Europe is a net energy importer
Higher energy prices = weaker growth + worse trade balance
US = energy exporter → relative advantage
Commodity shocks hit EUR much harder than USD
3) Policy divergence risk
Even if markets expect a weaker USD…
Inflation risk from energy could keep the Fed tighter while ECB is constrained by weak growth, and If the Fed stays tighter for longer than expected→ capital flows favor USD
What this means for EUR/USD
Even if the *long-term* USD story is bearish…
Short term = liquidity dominates fundamentals
If energy keeps rising and volatility increases then funding stress builds and then EUR/USD accelerates lower.
My home takepoint
This is not about classic “USD strength”.
This is about:
A global USD squeeze (energy + collateral driven)
Amplified by structural macro imbalances
That’s why I’m positioned for:
-Short-term USD strength
-EUR/USD downside acceleration
-Potential move toward 0.90 in a stress scenario
Nevertheless i believe, this is likely not permanent.
Once:
– Liquidity stabilizes
– Energy normalizes
– Policy reacts
The longer-term “weak USD” narrative can return.
But first…Markets may need to break something.