US Dollar: Pockets of Strength Amid Year-End Drift – TD Securities

The US Dollar (USD) has made only limited gains despite an AI-driven sell-off in global equities, a sign that its once-effortless safe-haven status is fading, according to TD Securities’ macro team led by Jayati Bharadwaj and colleagues. In their view, US equity performance relative to the Rest of the World (RoW) will remain the principal driver of the currency.

Could fading safe-haven appeal leave the USD modestly weaker?

"We continue to see US vs RoW relative equity performance as the main driver for the broad USD. Muted USD upside despite equity risk-off last week confirms our view that the USD is no longer the effortless haven currency it used to be. Although the USD rallied after US payrolls on Friday, the size of the payrolls surprise would validate the size of the USD move on the day (we previously estimated the DXY index would rally by +0.1% on the day for every +20k job gain surprise vs consensus forecast). If the AI-led US equity underperformance persists, we would expect the USD to end the year modestly weaker like it did in 2018."

"While we expect some modest USD downside into year-end, the magnitude will likely be muted as the EUR remains impaired by the French debt fragility. At the same time, we also find insufficient reasons for the USD to see a meaningful breakout to the upside, as aggregate USD positioning remains long, the market has likely priced in peak Fed hawkishness, and there is room for the USD to catch down toward the US equity market's relative underperformance."

"Although the USD continues to rank favorably in our scorecard, its overall standing has deteriorated over the past month."

"USD still benefits from a supportive external balance backdrop, a US economy that remains resilient, and its attractive carry profile. However, Equity factor has turned bearish USD."

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