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A new FX market assessment by TD Securities says it is too soon to bet against the U.S. Dollar.
"Trust your gut and stay long the USD," says Mark McCormick, Head of FX Strategy at TD Securities.
The strategist adds that "while the USD is off the latest highs, this drawdown is a dip-buying opportunity, not the start of a reversal."
The Dollar entered 2025 with a head of steam as markets prepared for punitive tariffs to be enacted by newly installed President Donald Trump.
However, the President has opted not to proceed with a universal tariff, which markets considered to be the most supportive outcome for the Dollar.
The U.S. has instead opted to pursue targeted measures and is toying with various measures, with no real clarity forthcoming for markets to bite into.
The result has been a drift lower in the Dollar, which was considered overvalued and overpositioned by analysts at the turn of the year. "Our short-term positioning and valuation models have been flagging an overbought USD since the start of the year," notes McCormick.
This has allowed the likes of Pound-Dollar and Euro-Dollar to recover.
TD Securities thinks the recent pullback by USD has cleaned out the risk premium and brought positioning back to more neutral levels.
"Our models are starting to show a USD discount now. Furthermore, the USD has macro tailwinds, including relatively strong macro signals backed by MRSI. We also think markets are too optimistic on tariffs and the dislocation of GeoMacro uncertainty and global macro volatility could lead to greater stress. That's broadly USD bullish," explains McCormick.
Above: The Dollar index has turned lower. But it's too soon to bet on the start of a real trend, says TD Securities.
The investment bank's forecasts remain USD bullish through H1, ahead of a more durable turn lower by the world's reserve currency.
However, other analysts see the potential for more enduring USD weakness.
Dominic Bunning, an analyst at Nomura, says moves to bring about peace in Ukraine pose a fundamental headwind to the Dollar.
"We flag four potential challenges to the stronger USD view, one being the prospect of a resolution in Ukraine," says Bunning.
"We think the key channels where we will see an impact is for energy importers (with fuel prices likely to decline on expectations of eventual supply increases, even if this takes time) and through the growth and investment channel in Europe. EUR and SEK should be the obvious outperformers," he notes.