The US Dollar Faces Downward Pressure Despite Strong Economic Data, UBS Analysts Predict Decline
In a recent report, UBS analysts have downgraded the US dollar to "Least Preferred" in their global strategy due to narrowing interest rate differentials, concerns over the US fiscal deficit, and shifting global monetary policies. Despite a temporary gain after revised second-quarter GDP figures were released, the dollar is expected to weaken in the coming months.
The US Federal Reserve is projected to continue cutting interest rates, with UBS forecasting a total reduction of 100 basis points by the end of 2024. Other central banks are also expected to reduce rates, but at a slower pace, making the dollar less attractive compared to other currencies.
Concerns over the US fiscal deficit and global monetary policy shifts are also expected to weigh on the dollar. As Vice President Kamala Harris leads in the polls, the fiscal deficit is likely to be a key issue in the presidential race, potentially creating additional headwinds for the dollar.
UBS predicts that the euro, British pound, and Australian dollar will all strengthen against the US dollar by June 2025. This anticipated weakening of the dollar has significant implications for global markets, with risk assets becoming more attractive as the dollar depreciates.
Investors are advised to consider reallocating cash into high-quality bonds from investment-grade companies to take advantage of the changing economic landscape. Despite some weaknesses in the US labor market, UBS maintains its base case for a soft landing for the US economy, supported by expected rate cuts from the Fed.