USD: Risk premia keeps upside in place – TD Securities

TD Securities strategists argue that US Dollar upside should persist while global risk premia stay elevated, even though their longer-term 2026 view remains bearish. They highlight a safe-haven bid versus relative rate headwinds, see scope for a near-term USD positioning adjustment, and flag rich Dollar valuation versus fundamentals in their HFFV model.

Safe-haven support versus rich valuation

"Baseline: USD upside should persist as long as risk premia remains elevated. We are not yet revising our bearish USD view for 2026, particularly if an off-ramp to the war emerges in the coming weeks. In that scenario, fading US growth exceptionalism, a reduced safe-haven premium, and a potential intensification of the “Hedge America” trade following recent US actions would all weigh on the dollar."

"FX volatility is likely to rise once growth concerns dominate. Tactical central bank hawkishness may offer temporary currency support, but a broader risk-off episode—via equities, positioning and rates—would keep the USD bid and push pressure into high-beta G10 and EMFX as the chain reaction completes."

"Risk-off dynamics—via positioning unwinds, equity drawdowns, and terms-of-trade shocks—point to broader USD strength."

"We see risk premium in broad dollar pricing. It is rich against most currencies according to our HFFV model especially as the USD has not weakened in line with relative rates pricing recently."

"Our aggregate portfolio has switched to a negative trading weight in the USD from a positioning clean out and technical valuations not looking as cheap anymore."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)