JPMorgan Stays Long USD as US Exceptionalism Widens Yield Gap

The dollar has rallied this month. Stronger US data and higher Treasury yields pushed the Fed further from cutting rates. JPMorgan kept its bullish USD stance and said it still favours long dollar positions, especially against the Canadian dollar.

The bank's call rests on the US growth premium. The economy has outpaced other developed markets. The Fed, while cautious, is not easing as fast as the European Central Bank or the Bank of Canada. That policy gap keeps yield spreads tilted in the dollar's direction.

JPMorgan's preference for USD over CAD reflects the Canadian dollar's exposure to slower global demand and lower commodity prices. When US outperformance draws capital into American assets, Canada feels the pull of weaker demand in Europe and China. The bank expects that dynamic to persist.

The dollar index is up roughly 3% from its early-month low. The move accelerated after the latest non-farm payrolls print, which showed hiring above 200,000. Average hourly earnings ticked higher. Solid employment and rising wages kept the market pricing the Fed on hold for longer. Rate cuts implied for 2025 have been pushed to the second half.

Treasury yields moved in step. The 10-year note rose about 20 basis points this month. Real yields gained, drawing foreign buyers into US debt. That flows through to the dollar. The correlation between yield spreads and the dollar has tightened after breaking down briefly in late summer.

JPMorgan is not alone. Goldman Sachs upgraded its USD forecast, citing the resilience of the US economy relative to peers. Morgan Stanley noted that positioning in the dollar was still light, leaving room for further gains. The shift among consensus is not uniform. Some strategists argue the dollar is overbought and due for a pullback once the Fed cuts. JPMorgan disagrees. The bank expects the Fed to hold steady until inflation shows a more convincing decline.

The next test for this view comes next week. The Fed releases the minutes from its latest meeting. A hawkish tone would reinforce the dollar's momentum. Later this month, the January CPI report will be the next major data point. If core inflation stays above 3%, the case for a long wait on rate cuts firms up. That would support JPMorgan's trade.

The Canadian dollar, at 1.44 per USD, is testing levels not seen in nearly two years. JPMorgan's target may be higher still. The next few days will tell whether the market needs a fresh catalyst or the current data flow is enough.