TD Securities strategists maintain that the US Dollar (USD) is likely to remain strong in the near term as global risk premia stay elevated, despite their longer-term bearish outlook for 2026 [1]. The strategists highlight that the USD 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 dollar has not weakened in line with relative rates pricing recently, suggesting that risk premium is embedded in broad dollar pricing [1].
The report points out that risk-off dynamics, including positioning unwinds, equity drawdowns, and terms-of-trade shocks, are contributing to broader USD strength [1]. FX volatility is expected to rise if growth concerns become dominant, and while tactical central bank hawkishness may provide temporary support for currencies, a broader risk-off episode would keep the USD bid and exert pressure on high-beta G10 and EMFX currencies [1].
TD Securities also flags the possibility of a near-term USD positioning adjustment, as their aggregate portfolio has switched to a negative trading weight in the USD following a positioning clean out and technical valuations that are no longer as cheap [1]. However, they are not revising their bearish USD view for 2026, especially 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 all weigh on the dollar [1].
CONCLUSION
TD Securities expects the US Dollar to remain supported in the near term due to elevated risk premia and safe-haven demand, despite its rich valuation. Their longer-term outlook remains bearish, contingent on geopolitical developments and shifts in US growth dynamics. Market participants should monitor risk-off events and positioning adjustments for potential USD volatility.