TD Securities expects the US Dollar to show modest strength in Q3 2026 as long positioning has capacity to rebuild, but it sees limited scope for a sustained move higher. The bank anticipates the Federal Reserve will stay on hold for an extended period, with tighter policy requiring further confirmation of resilient inflation and labour-market conditions; if supply-side inflation drove Fed hikes, other central banks such as the ECB could also tighten. Against that backdrop, TD Securities expects episodic USD support from safe-haven demand and lingering uncertainty around oil prices, geopolitics and the policy path.
The firm argues the absence of a USD spot breakout, despite a structurally higher FX volatility regime, should cap volatility gains through 2026. It links the Q2 rally to US trading hours and firmer Fed hike pricing, and expects that move to unwind if rate-hike expectations are priced out. With the USD regaining some negative correlation with US equities and demand for hedging US exposures easing, TD Securities forecasts a 2% dollar decline in the second half of 2026, while maintaining a broadly range-bound spot trend.
—Trading Strategies amid Modest US Dollar Strength and Range-Bound Environment
We expect the US Dollar to experience modest, short-term strength in the coming weeks before starting a projected 2% decline in the second half of 2026. With the US Dollar Index (DXY) currently trading in a tight range near 104.50, derivative traders should avoid betting on a major breakout. Instead, we recommend using range-bound options strategies, such as iron condors, to capitalize on this consolidation.
Even though geopolitical tensions and fluctuating Brent crude prices around $82 a barrel keep markets on edge, implied FX volatility is likely to remain capped. Because the Federal Reserve is expected to keep interest rates steady through Q3, major currency fluctuations will be limited. This environment favors selling volatility or utilizing short-term straddles to capture premium decay.
Tactical Long-Dollar Opportunities and Evolving Equity-FX Correlation
We see the best opportunities for expressing brief US Dollar upside by entering long USD/CNH forward contracts or call options. There is still significant room for long-dollar positioning to rebuild against the Australian Dollar (AUD) and the Brazilian Real (BRL) as election uncertainties near. This tactical approach allows traders to exploit minor corrections in these specific pairs without overcommitting to a prolonged dollar rally.
Recent data shows the negative correlation between the USD and US equities has returned to its historical average of around -0.4. Because of this, global investors have reduced their equity hedging, and high hedging costs are unlikely to fall since US inflation remains sticky near 3%. Derivative traders should structure their portfolios to account for this renewed equity-FX relationship rather than expecting a sudden surge in currency hedging demand.
