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The U.S. dollar’s recent weakness may mark the beginning of a prolonged decline, as mounting market pressures and economic data surprises unsettle currency fundamentals, according to TD Bank.
"The market is managing a heavy load of drivers, including a mix of tariff news, term premium shocks, and data,” said Mark McCormick, Global Head of FX and EM Strategy at TD's Securities division. "The latter is becoming increasingly important to the narrative given that positioning and short-term valuations sit at extremes."
Despite a major repricing across interest rate curves, the dollar is showing no correlation to rates—a disconnect that McCormick described as "likely unsustainable."
U.S. economic data has consistently outpaced expectations, with surprise indices near record highs. “U.S. data surprises are running near the 100th percentile over the past few months," McCormick said in a recent research briefing note. "They are also outpacing the rest of the world, suggesting increased two-way risks on Fed pricing and the near-term outlook for the economy.”
While recent market movement has been mostly characterised by dollar selling, TD expects the depreciation to play out gradually. "We believe that the longer-term USD slide is just beginning, but this will be a marathon, not a sprint," McCormick said.
He added that there is "very little evidence of the sell America theme in the high-frequency data," indicating that speculative positioning remains a key factor driving the current trend.
Above: The Dollar index, a measure of broader USD performance.