USD: Conditional haven, limited durability – TD Securities

TD Securities strategists argue the Dollar is acting as a conditional safe haven during the Iran-related shock, helped by the US economy’s relative insulation and prior short USD positioning. They see near-term USD upside as risk premia stay elevated, but maintain a bearish 2026 view given fading US growth exceptionalism, fiscal concerns and diminished haven appeal.

Dollar gains seen as tactical and temporary

"USD upside should persist while risk and uncertainty premia remain elevated, potentially echoing the price action seen in June 2025 for a few weeks until a regime shift happens in Iran with US backing or even through a prolonged but limited regional war (with lower intensity strikes spread out and no ground invasion). We are not yet changing our bearish USD view for 2026, given fading US growth exceptionalism, diminished safe-haven appeal, and the ongoing “Hedge America” trade, which may intensify after recent US actions."

"Tail risks have grown large enough to warrant attention and hence we offer a playbook for the scenario of escalation and extended conflict."

"In this scenario, the US prioritizes the inflation shock, keeping the Fed on hold, while peers face simultaneous growth and inflation shocks, pushing rate differentials further in USD’s favor. In terms of macro impact, China, Europe and EM Asia will be most exposed."

"We see scope for a near-term USD positioning adjustment, but expect some limits to escalation on both sides of the conflict, particularly in a US midterm election year. An extended war will complicate the Fed's ability to cut interest rates at a time when Trump has prioritized affordability to shore up voter support."

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