UBS predicts further depreciation of the U.S. dollar due to narrowing interest rate differentials, ongoing U.S. fiscal deficit concerns, and a shift in global central bank strategies. Despite a brief rally, UBS has downgraded the U.S. dollar to its Least Preferred status, while upgrading the euro, British pound, and Australian dollar.
UBS Predicts Further Weakening of US Dollar
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UBS Forecasts Continued Weakening of US Dollar
UBS, a global financial services firm, released a report on Friday from its Chief Investment Office indicating that the U.S. dollar is likely to face further depreciation. The report states:
We still expect the dollar to decline further in the coming months for several reasons.
Although the dollar experienced a brief rally following revised second-quarter GDP growth figures — raised to an annualized rate of 3% from 2.8% — and stronger consumer spending data, it remains vulnerable, UBS noted.
The U.S. dollar index (DXY) has decreased by 3% over the past month, staying near the lower end of its range since the start of 2023. UBS analysts emphasized that “the balance of risks for the USD appears skewed to the downside,” suggesting that even positive inflation or labor market data is unlikely to deter the Federal Reserve from a potential rate cut in September, particularly if these indicators fall short of expectations.
Several factors are poised to pressure the dollar further according to UBS. The financial services firm pointed out that “interest rate differentials look set to narrow,” as central banks like the Swiss National Bank and the European Central Bank are expected to adopt more gradual approaches to rate cuts compared to the Federal Reserve. Additionally, UBS underscored that “the U.S. fiscal deficit remains a concern,” highlighting long-term risks for the currency.
In response to these dynamics, the UBS Chief Investment Office has adjusted its global strategy:
Against this backdrop, we recently shifted the U.S. dollar to Least Preferred in our global strategy and moved the euro, the British pound, and the Australian dollar to Most Preferred.
“We expect all of them to regain ground against the U.S. dollar over our forecast horizon,” the report adds.
What do you think about UBS’s forecast for the U.S. dollar’s depreciation and the potential rise of other currencies? Let us know in the comments section below.
