US Dollar: Range-bound gains and episodic strength – TD Securities

TD Securities strategists expect modest US Dollar (USD) strength in Q3 2026 as positioning has room to rebuild. However, they see limited sustained upside, with the USD reverting to a traditional safe-haven profile and a more range-bound spot trend, and forecast about a 2% Dollar decline in the second half of 2026.

Safe-haven profile with capped upside

"We expect the Fed to remain on an extended hold. The bar for the Fed to hike is lower, but the FOMC committee likely needs to see more evidence of continued strength in inflation and the labor market before embarking on a hiking path. And in an environment where the Fed starts hiking due to supply-side inflation concerns, other global central banks, including the ECB, are likely hiking as well."

"USD positioning is long but not extremely stretched, leaving room for further buildup in the long dollar trade if uncertainty around oil prices, geopolitics and the Fed path linger on. We expect some lingering bullish USD momentum in Q3 with positioning in AUD, CNH and BRL (closer to election) having more room to correct with the long USD trade. We prefer to express the view of any USD upside via long USD/CNH forwards."

"Despite the structurally higher FX vol regime, the lack of USD spot trend breakout and Fed staying on hold will likely put a lid on how much FX vol could rise in 2026. We see limited USD upside in 2026 as the USD rally in Q2 largely occurred in US trading hours and corresponds with increased Fed hike pricing. To the extent that we believe markets will price out rate hikes for the year, the USD's gain in US trading hours from Q2 would reverse course."

"As we wrote earlier, the USD has regained some of its historically negative correlation with US equities, and global investors' interest in hedging US investments has pared back. The Fed is also unlikely to reduce hedging costs with more rate cuts in 2026, as US y/y inflation will stay elevated until end of the year due to base effects. As a result, while we are forecasting a modest 2% USD decline in second half of the year, more range-bound USD spot trend will serve as a headwind for FX vol breakouts."

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