TD Securities is urging traders to stay long the U.S. dollar as fundamental drivers keep the currency poised for gains despite the volatility spurred by President Donald Trump’s tariff threats.
The dollar has moved around in recent weeks as currency traders are hanging on every trade-related word uttered by Trump. He said Tuesday he would likely impose tariffs of around 25% on automobile, semiconductor and pharmaceutical imports, with an announcement as early as April 2. This comes after the president ordered up a study on potential new levies on a country-by-country basis.
The Bloomberg Dollar Spot Index has lost more than 2% after a recent spike earlier this month when Trump announced 25% tariffs on imports from Mexico and Canada. He subsequently delayed the implementation of the new levies. The dollar rallied at the end of 2024, supported by concerns around tariffs and caution around future interest-rate cuts.
“Markets have been playing headline ping-pong again since Trump‘s inauguration,” strategists including Mark McCormick, Jayati Bharadwaj and Ray Ng wrote in a note Wednesday. “While the dollar is off the latest highs, this drawdown is a dip-buying opportunity, not the start of a reversal.”
Markets are too optimistic on tariffs, and “macro volatility could lead to greater stress,” the strategists said. TD’s models are showing a dollar discount, but the team said it remains broadly dollar bullish. The strategists said they favor the Japanese yen on cross with other currencies in the Group of 10, adding that they like long USD/CAD in options and short EUR/JPY in cash.
A dollar gauge traded stronger for a second day Wednesday after falling in January, its first decline in four months as markets switched between risk-on and risk-off sentiment due to tariff news.
“Our short-term positioning and valuation models have been flagging an overbought dollar since the start of the year,” the strategists at TD wrote. “The recent pullback has cleaned out the risk premium and brought positioning back to more neutral levels.”
Speculative traders pared bullish bets for a fourth straight week through Feb. 11, though positioning remains long the dollar, data from the Commodity Futures Trading Commission showed.
“The issue with this narrow mindset is that markets are reflecting a regime change to the existing global trade order but have little clarity on what’s coming next,” the strategists said.
Anya Andrianova, Bloomberg News
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