US Dollar: Low volatility risks and summer outlook – ING

ING strategists Francesco Pesole and Frantisek Taborsky note that DXY-weighted short-term implied volatility has dropped to 2021 levels, despite geopolitical tensions and Federal Reserve risks. Pesole argues that AI-driven equity resilience is anchoring currencies and supporting carry trades. He sees upside risks for FX volatility and short-term Dollar gains, but still expects a weaker Dollar after summer if Middle East tensions ease and Oil declines.

FX vols compressed, risks skew higher

"DXY-weighted one-month implied volatility has broken below the 5.50 area that marked the January, May and June lows. Excluding the Christmas 2025 dip, it is now at its lowest level since 2021."

"That is remarkable given the serious military re-escalation between the US and Iran and the prospect of a new Federal Reserve tightening cycle. The explanation goes beyond the muted energy-market response to the July Gulf headlines. We suspect it primarily reflects how well contained volatility remained between March and May despite sizeable moves in both rates and commodity prices. Incidentally, AI-fuelled equity resilience still appears to be anchoring currencies and helping sustain a self-reinforcing low-volatility, carry-trade environment."

"At this stage, risks are clearly skewed to the upside for both FX volatility and the dollar. The longer oil prices only partially price a new supply shock, the greater the risk of non-linear rallies. But there is also a realistic path towards Middle East de-escalation, lower oil prices and more dovish flexibility at the front end of the USD curve."

"That would ultimately point to a weaker dollar across the board. This remains our baseline for after the summer, although we acknowledge that the near-term backdrop looks far less supportive for USD bears."