The US dollar (USD) is trading close to its peak from 2026, buoyed by persistent inflation and increasing interest rate disparities in the United States, according to Stephen Marion and Kyle Dahms from the National Bank of Canada (NBC). They expect short-term support for the dollar to continue but express doubts about any immediate tightening from the Federal Reserve, noting a softening in employment data and a rise in speculative positioning. Their forecast for the broad USD index indicates a gradual decline, projecting it to drop from 120.8 to 115.9 by the second quarter of 2027.
Dollar rally gains support but stagnates
“The USD has appreciated and is currently near its 2026 high due to ongoing US inflation and widening interest rate spreads. Nonetheless, we aren’t convinced that the Fed will tighten soon given the current positioning. While the dollar should maintain its strength in the near term, the rally appears increasingly crowded as we head beyond the third quarter.
“This shift reinforces the dollar’s interest rate advantage, which explains its recent strength against all major currencies over the past month.”
“That said, we are not as sure that an immediate policy tightening from the Fed is on the horizon. The employment report for June indicated an increase of only 57,000 nonfarm payrolls, significantly lower than expected, and previous months have seen downward revisions totaling 74,000 jobs. The Household Survey revealed an even sharper decline, with a 570,000-job drop in employment and a marked decrease in full-time job vacancies.”
“While this aligns with market optimism about the dollar, it suggests that investor positioning may already reflect some of this movement. Therefore, while we think the dollar is well-supported in the near term, the combination of modest job growth and tighter positioning limits our ability to predict a continued rally beyond Q3.”
“This viewpoint aligns with the noticeable gap between the Fed’s forecasts and those of private economists. Half of FOMC participants anticipate a rate increase this year, whereas only about 10% of forecasters agree. We share this skepticism. Although persistent inflation argues against rate cuts, the gradual increase in job creation indicates that policymakers have some leeway before further tightening is necessary.”
