The US dollar continues to trade in stubbornly tight ranges, reflecting the tug of war between competing narratives. Economists at TD Securities do not expect a near-term break of range trading but think we have likely seen another USD top.

Global growth

“The market continues to manage the competing themes of decelerating global growth and central bank stimulus withdrawal. We note the gap between global inflation and growth upgrades and downgrades for the year ahead. It feels like a supply shock. How policymakers handle this gap will dictate the price action ahead for the USD. The Fed should continue to look through the inflation shock, erring to support growth. In turn, that should limit USD rallies and boost risk.”

Financial conditions

“Global financial conditions are more supportive of growth than at any other point over the last 15 years. As a result, the global growth backdrop should support a weak USD in the months ahead. Even in the face of Fed tapering, we don't expect a real rate shock on par with the 2013 taper.”

Market factors

“For most of this year, USD has closely followed our global risk framework, GMRI. Ironically, the focus of risk appetite itself the past few months has seen currencies focus less on macro factors and more on technical aspects like valuations and positioning. Carry has been important too. More clarity on the Fed's taper timeline and the impact of the delta variant would likely shift some focus back to growth.”

 

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