US Dollar: Is the Fed’s hawkish stance supporting resilience? – TD Securities

Further US Dollar strength remains the outlook of TD Securities’ FX team, led by Jayati Bharadwaj and Howard Du, as expectations for Fed rates move higher. In their view, firmer US data and rising yields underpin the USD. With the Fed expected to out-hike other major central banks, they see USD/CAD likely returning to test 1.43 and EUR/USD vulnerable to further declines towards levels below 1.10.

Can Higher US Yields Keep the Dollar Supported?

"FX: The USD will likely stay resilient until peak Fed hawkishness. USDCAD could retest year-to-date high at 1.43 in the near-term. Breakout below 1.11 in EURUSD likely opened the door for more downside."

"The USD will likely remain resilient until Fed hawkishness peaks. The USD's efficacy as an equity risk-off haven asset has evidently declined, as shown by the falling correlation between the US dollar and US equity. However, rising US yields should still provide upward momentum for the USD, particularly if the market believes the Fed can out-hike other major central banks in the coming months."

"In G10, USDCAD will likely retest the year-to-date high at 1.43 as weak data in Canada weighs on near-term BoC rate hike likelihood relative to the Fed. We also closed our EURUSD risk reversal position as the prospect for more spot downside toward sub-1.10 range has increased."

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