TD Securities strategists say firmer US data and renewed US exceptionalism talk are not enough to make them drop a bearish US Dollar view for 2026. They point to only middling US outperformance versus the Rest of World, and argue there is limited evidence that an energy-driven headline inflation shock is feeding through into core inflation in a way that would justify a prolonged global hiking cycle.
They expect the Federal Reserve to stay on hold, even if it drops an easing bias, and say markets may be moving too quickly in pricing full hikes. The team also argues the Fed has yet to show it could out-hawk other central banks as it did in 2022 if 2026 data were to warrant tightening. With growth holding up outside the US, a risk premium linked to a potential Strait of Hormuz closure unwinding over time, and moderate rate rises from authorities such as the ECB narrowing rate differentials against a stationary Fed, they see scope for further USD downside later this year.
Resilience Abroad and Waning Exceptionalism
We are not convinced it’s time to drop the bearish US Dollar thesis for later in 2026. The market is currently focused on strong US numbers, like April’s non-farm payrolls which came in at a solid 255,000, fueling the narrative of American economic exceptionalism. This recent strength, however, seems temporary and overlooks a broader global picture.
In the coming weeks, we should look for opportunities to position for a weaker dollar in the second half of the year. While the Federal Reserve will likely drop its easing bias in its next meeting, pricing in actual rate hikes seems premature given that core inflation has remained steady around 3.1%. The Fed is more likely to remain on hold, unlike the aggressive hiking cycle we saw in 2022.
Meanwhile, growth in the rest of the world is holding up better than many expect. For example, the latest S&P Global Eurozone PMI Composite Output Index registered 52.5, indicating continued expansion and resilience in the European economy. With Eurozone core inflation ticking up to 2.8% last month, we see the European Central Bank closing the rate differential gap with a moderate hike this summer.
Strategies For A Weaker Dollar And Waning Safe-Haven Flows
This means traders should consider using options to position for this expected dollar downturn. Buying out-of-the-money puts on the US Dollar Index (DXY) with expirations in the fourth quarter could be a cost-effective strategy. This allows for participation in a potential slide without taking on the immediate risk of a spot short position.
We also see risk premiums eventually unwinding from the recent tensions around the Strait of Hormuz, which has provided a safe-haven bid for the dollar. As diplomatic efforts progress, this support should fade. The Bank of Japan’s recent shift to a more neutral policy stance has also started to put a floor under the yen, adding another source of pressure on the dollar.
