TD Securities’ macro team kept a bearish bias on the US dollar after markets took a hawkish cue from Chair Warsh’s Jackson Hole speech. It expects incoming US data to steer the Fed towards a September rate hold, rather than a hike, and sees the broader USD trend weakening into year-end as macro fundamentals and US midterm election outcomes shape FX. The bank said words alone are unlikely to reset the narrative, arguing a durable rebound would require clearer policy follow-through alongside renewed upside surprises in data.
Attention is expected to move towards the midterms after Labour Day, with the USD projected to trade moderately weaker to neutral under gridlock. A “Blue Wave” is framed as a risk of knee-jerk USD strength, with TD citing improved institutional credibility and a fall in long-dated Treasury term premium, and it positioned for this via owning USD/CNH. By contrast, a scenario in which Republicans retain full control of Congress was described as the most bearish for the currency; TD preferred lower USD/SEK under divided government, referencing seasonality, FX valuation and a 2018 analogue.
US Dollar Outlook and Trading Strategies
As we enter September 2026, we advise derivative traders to position for a weaker US Dollar in the coming weeks. Despite some hawkish rhetoric from the Federal Reserve at Jackson Hole, cooling US economic data strongly points to a rate hold at the September 17 policy meeting. Currently, federal funds futures are pricing in an 80% probability of a pause, which should limit any sustained upward momentum for the greenback.
We recommend using derivative strategies to fade any temporary USD rallies, particularly against the Swedish Krona (SEK) and Australian Dollar (AUD) in G10 markets. For emerging markets, buying call options on the Mexican Peso (MXN) and South African Rand (ZAR) against the USD offers highly attractive risk-reward ratios. Historical seasonal data shows that the Dollar Index (DXY) has averaged a 1.5% decline in the two months leading up to midterm elections over the last thirty years, supporting this bearish bias.
Midterm Election Scenarios and Derivative Positioning
With the US midterm elections approaching after Labor Day, political uncertainty will soon dominate currency markets. Our baseline expectation is a divided Congress, which historically leads to legislative gridlock and a moderately weaker Dollar. In this gridlock scenario, we favor buying SEK call options (selling USD/SEK) to capitalize on favorable Swedish valuations and historically strong late-year seasonality.
Conversely, traders must prepare for the risk of a “Blue Wave” where Democrats gain full control, potentially sparking a knee-jerk surge in USD strength as long-term Treasury yields adjust. To hedge against this specific outcome, we suggest holding long USD/CNH (Chinese Yuan) call options. This positioning protects portfolios against a sudden rise in US institutional credibility and shifting term premiums.
On the other hand, if Republicans maintain full control of Congress, we expect the most bearish outcome for the greenback. Under this scenario, short USD positions should be aggressively scaled up across both developed and emerging markets. By utilizing structured options, we can navigate these diverging political outcomes while minimizing upfront premium costs.
