The precipitation of hydrides in zirconium alloys is accompanied by a significant and anisotropic volumetric expansion. Previous literature quantified the misfit both theoretically and experimentally, but these values differ greatly; the experimental values are consistently lower. One possibility is that the experimental measurements include the effect of dislocations generated by the hydride, which relax the transformation stresses. To test this hypothesis, it is important to determine the stress field of a hydride and its associated dislocations, combined. A simple planar dislocation model was developed of the hydride—dislocation ensemble in -Zr. By capturing details of the dislocation structures given in the literature, it is shown in this study that including the interfacial dislocations largely reconciles the predicted and experimental values. Discrete dislocation plasticity is then used to model the diffuse plastic relaxation associated with hydride formation. The effects of plastic relaxation on the equilibrium hydrogen profile, hence the implications for subsequent hydride precipitation, are discussed. In particular, precipitation–dissolution cycles were simulated to calculate the magnitude of the residual hydrostatic tension, which is argued to be the primary cause of the “memory effect” for the re-precipitation of both and hydrides.