Dollar: The Credibility Risk of the Dollar – TD Securities

TD Securities' latest view notes that this week's Jackson Hole global central bank symposium is more about testing the Fed's policy credibility than providing new directional guidance for the dollar. The firm believes market expectations for the rate path are already relatively anchored, but the real risk is that if the Fed chair fails to firmly reaffirm its mandate to control inflation, the dollar's safe-haven and yield advantages could be eroded.

**Fed Consensus Break Would Amplify Dollar Selling**

TD Securities strategists analyze that the dollar's current trajectory is highly sensitive to the degree of internal policy consensus at the Fed. If the meeting shows a unified front among policymakers in tackling inflation, it would help bolster dollar confidence; conversely, any signal undermining the inflation target could weaken the dollar's appeal. Market data shows speculative dollar long positions have climbed to multi-year highs, building up significant correction risk. Should the Fed's credibility come into question, funds that flowed in on rate hike expectations and safe-haven demand could exit quickly, triggering a reflexive selloff in the dollar index.

**Fragile Balance Under an Anchored Rate Outlook**

Although TD Securities expects rate expectations to remain anchored, it warns this does not mean the dollar is immune to downside. The dollar index is currently trading near 98.944, with much of its strength already priced in based on expectations of sustained Fed tightening. If the meeting fails to deliver new hawkish surprises—or worse, reveals divisions among policymakers over the inflation outlook—the dollar could face downward pressure as event-risk premiums fade. Additionally, any overly cautious language in the statement or press conference regarding economic slowdown risks could be interpreted as a precursor to policy pivot, further undermining dollar longs.