Dollar Bounce Has a Ceiling: TD Bank

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The dollar has room to extend its recent gains, TD Bank says, but strategists say this is not to be mistaken for a sustained appreciation due to a structural shift.

And that's important: there's been a distinct shift in how many in the FX community are approaching the dollar, with a number of tier-one analysts now saying fundamentals have moved in its favour.

But analysts at TD's Securities division think USD strength will ultimately prove relatively short-lived, a distinction that rests on a precise diagnosis of what drives durable dollar strength.

For further near-term support, the dollar can count on the Strait of Hormuz remaining closed to normal traffic as well as 'hawkish' risks in the June Federal Open Market Committee meeting.

But sustained appreciation requires two conditions to hold simultaneously: high inflation and strong growth; "a combination that appears harder to replicate," TD Securities says, "leaving the USD more capped and cyclical than structurally dominant."

U.S. growth remains resilient, the analysts say, but "the economy is less overheated and well short of previous exceptionalism." That's a direct challenge to the narrative that powered the dollar's 2022 and 2023 peaks.

Rate differentials, the mechanical engine of that earlier USD dominance, are also not expected to return to those extremes because the Federal Reserve is no longer materially outpacing global peers in the way that once sustained capital inflows into dollar assets at scale.

Two structural forces also compound the ceiling: Safe-haven dynamics are softening, TD Securities says, while investors continue to diversify and hedge exposure to US assets, pointing to "a less dominant USD backdrop" over the medium term.

Bigger picture, TD Securities forecasts a further 3% decline in the dollar before the end of 2026.

This bounce, therefore, has a ceiling.