TD Securities strategists assert that the US Dollar's upside should persist as long as global risk premia remain elevated, despite their longer-term bearish outlook for 2026 [1]. The team highlights that the Dollar is benefiting from a safe-haven bid, even as its valuation appears rich compared to fundamentals according to their HFFV model [1]. They note that the USD has not weakened in line with relative rates pricing recently, suggesting a risk premium is embedded in broad dollar pricing [1].
The strategists point out that risk-off dynamics, including positioning unwinds, equity drawdowns, and terms-of-trade shocks, are contributing to broader USD strength [1]. They anticipate that FX volatility is likely to rise once growth concerns become dominant, and while tactical central bank hawkishness may provide temporary currency support, a broader risk-off episode would keep the USD bid and exert pressure on high-beta G10 and EMFX currencies [1].
Looking ahead, TD Securities maintains a bearish USD view for 2026, particularly if an off-ramp to the war emerges in the coming weeks. In such a scenario, fading US growth exceptionalism, a reduced safe-haven premium, and a potential intensification of the 'Hedge America' trade following recent US actions could weigh on the dollar [1]. Their aggregate portfolio has recently switched to a negative trading weight in the USD, citing a positioning clean out and technical valuations that are no longer as cheap [1].
CONCLUSION
TD Securities expects the US Dollar to remain strong in the near term due to elevated risk premia and safe-haven demand, but sees potential for weakness in 2026 if geopolitical tensions ease and US growth slows. Market participants should monitor risk-off dynamics and positioning shifts, as these factors are likely to drive FX volatility and broader currency movements.