US Dollar: Crowded support into year-end – NBC

National Bank of Canada ’s (NBC) Stéfane Marion and Kyle Dahms note the US Dollar (USD) is trading near its 2026 high as sticky United States (US) inflation and wider rate differentials underpin the currency. They see USD support persisting near term but question imminent Fed tightening given softer payrolls and stretched speculative positioning. Their broad USD index forecast gradually declines from 120.8 to 115.9 by Q2 2027.

Dollar rally supported but stretched

"The greenback has extended its rally, hovering near its 2026 high as sticky U.S. inflation and wider rate differentials continue to support the currency. But with June payrolls softer, the household survey weaker, and speculative USD positioning now stretched, we are not convinced that Fed tightening is imminent. USD support should persist in the near term, but the rally looks increasingly crowded beyond Q3."

"That repricing has reinforced the dollar’s interest-rate advantage and helps explain why the greenback has gained ground against every major currency in the past month."

"We are less convinced, however, that the Fed is preparing to tighten policy imminently. June’s employment report showed nonfarm payrolls increasing by only 57K, well below consensus expectations, while prior months were revised down by a cumulative 74K. The household survey was weaker still, reporting a 507K decline in employment and a sharp drop in full-time positions."

"This confirms that the market has embraced the stronger-dollar narrative, but it also means that part of the move may already be reflected in investor positioning. As a result, the USD could become more vulnerable to softer inflation data, further signs of labour-market cooling, or any reduction in expectations of Fed tightening. Our view is therefore that the dollar remains well supported in the near term, but the combination of modest job growth and increasingly stretched positioning against extrapolating the recent rally beyond Q3."

"This interpretation is consistent with the considerable gap between the Federal Reserve’s own projections and those of private-sector economists. While half of FOMC participants anticipate higher rates this year, only around 10% of forecasters expect an increase. We share that skepticism: persistent inflation argues against rate cuts, but the modest uptrend in job creation suggests policymakers have time to wait before tightening further."