TD Securities strategists anticipate modest US Dollar (USD) strength in the third quarter of 2026, citing that current USD positioning is long but not extremely stretched, which leaves room for further buildup in the long dollar trade if uncertainty persists around oil prices, geopolitics, and the Federal Reserve's policy path [1]. However, they forecast a limited sustained upside for the USD, expecting the currency to revert to a traditional safe-haven profile and maintain a more range-bound spot trend [1].
The strategists project about a 2% decline in the USD during the second half of 2026, attributing this to the expectation that markets will eventually price out further rate hikes for the year, which would reverse the USD's gains seen in US trading hours during Q2 2026 [1]. They note that the Federal Reserve is expected to remain on an extended hold, with a lower bar for hiking rates, but the FOMC committee would require more evidence of continued strength in inflation and the labor market before considering a hiking path [1].
TD Securities also highlights that if the Fed begins hiking due to supply-side inflation concerns, other global central banks, including the European Central Bank (ECB), are likely to hike as well [1]. The report mentions that while there is some lingering bullish USD momentum in Q3, particularly in relation to AUD, CNH, and BRL, the overall upside for the USD is capped, and they prefer to express any USD upside via long USD/CNH forwards [1].
Additionally, the strategists point out that despite a structurally higher FX volatility regime, the lack of a USD spot trend breakout and the Fed's likely hold will limit how much FX volatility could rise in 2026 [1]. They also observe that the USD has regained some of its historically negative correlation with US equities, and global investors' interest in hedging US investments has decreased. The Fed is unlikely to reduce hedging costs with more rate cuts in 2026, as US year-over-year inflation is expected to stay elevated until the end of the year due to base effects [1].
CONCLUSION
TD Securities expects the US Dollar to show modest strength in Q3 2026 but forecasts a 2% decline in the second half of the year, with the currency remaining range-bound. The Fed's extended hold and global central bank actions are seen as key factors limiting USD upside and FX volatility.