TD Securities Sees Limited Upside for US Dollar Despite Resilient Economy

TD Securities has observed that while the US economy and labor market remain resilient, they are not showing signs of overheating. This assessment has led the firm to push back its expectations for Federal Reserve rate hikes to December 2026 and March 2027. The firm believes that market pricing for Fed hawkishness has likely peaked, making it difficult to sustain a persistently bullish outlook for the US dollar solely based on Fed policy and economic data.

The firm notes that recent US data suggests the Fed cannot accelerate its rate hikes beyond a quarterly pace, which limits the potential for the dollar to gain additional strength from tighter monetary policy. Despite this, the USD remains the highest-ranked currency on TD Securities' scorecard, supported by favorable rate differentials, strong economic growth, and robust equity performance.

Market positioning has also shifted to favor the dollar, with long dollar positions proving profitable. This has left short positions in low-yielding G10 currencies, particularly the Swedish krona (SEK), Canadian dollar (CAD), and New Zealand dollar (NZD), looking crowded.