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Services strength and Fed stance keep dollar bid – TD
TD Securities notes services strength supports a hawkish Fed stance, keeping the dollar bid. This reprices rate differentials and pressures EUR/USD. Next marker: ISM services print.
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A strong run of US services-sector data is reinforcing a hawkish Federal Reserve stance, and TD Securities sees that pairing as the primary driver keeping the US dollar bid across major pairs. The signal for traders is not simply that the economy is holding up. The transmission runs through rate expectations, yield spreads, and carry demand.
Services Data and the Repricing of Fed Expectations
January and early-February services figures have come in above consensus, with components like new orders and employment running hot. TD Securities argues that this persistence in services inflation–the part of the economy most sensitive to labor costs–is what stops the Fed from committing to a near-term rate cut. The market has pushed back pricing for the first 25-basis-point reduction from March to May or June, and the dollar has tracked that repricing higher.
The simple read is that good data equals a strong dollar. The better market read is that services data directly challenges the disinflation narrative. When services inflation remains sticky, the Fed's reaction function shifts toward a higher-for-longer rate path. That forces short-term yields higher relative to peers, which widens nominal rate differentials and pulls carry-focused capital into the dollar.
Dollar Transmission Through Yields and Carry
The shift is visible across the short end of the curve. The 2-year US Treasury yield has climbed nearly 15 basis points over the past two weeks, widening the spread over German and Japanese equivalents. A wider spread is a mechanical tailwind for the dollar because it improves the return on holding dollar-denominated cash versus other currencies. TD Securities notes that this yield support has been the dominant factor in the dollar's February rally, overwhelming any risk-on flows from equity gains.