The US Dollar Weakens as Equity Markets Rebound: UBS Analysts Caution Against Assumptions
The US dollar has weakened this week as equity markets rebounded from early-August declines, with expectations for a more dovish Federal Reserve persisting. UBS Global Research analysts warn against assuming a sustained downturn in the US dollar, despite the euro reaching new highs against the USD in 2024.
Market sentiment has improved, leading to a rally in risk assets and a partial recovery in equity markets. However, US front-end yields have only modestly rebounded, indicating that further significant dollar weakness may face hurdles, especially with Fed rate cut expectations already priced in.
UBS analysts believe that the recent strength in EURUSD may be overextended, with the pair pricing in unanticipated US weakness or excessive optimism about Europe's economic prospects. They expect EURUSD to struggle to maintain levels above 1.11 for an extended period.
In the broader global economic outlook, uncertainties remain, with limited signs of improvement outside the US. China's stimulus efforts and downward revisions in growth forecasts for the Eurozone reduce the likelihood of a significant shift away from the dollar and US assets.
UBS analysts also discuss movements in other major currencies, noting that the Japanese yen and Swiss franc reflect global risk sentiment. Morgan Stanley expects the Bank of Japan to maintain a cautious approach, potentially leading to a yen rebound.
In conclusion, investors should be cautious about assuming continued weakness in the US dollar, as market positioning and economic fundamentals suggest hurdles to further significant depreciation. Positive US economic data could lead to a tactical recovery in yields and the USD. Stay informed about global economic developments and currency movements to make informed investment decisions.