The U.S. dollar has recently fallen to the lowest level this year on raised expectations that the Federal Reserve will shortly start cutting interest rates, and UBS sees further losses ahead. At 05:55 ET (09:55 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower to 101.577, after sinking as low as 100.51 last week for the first time since July 2023.
“The dollar has given up ground on a broad basis versus risk-on and risk-off currencies alike,” said analysts at UBS, in a note, and “we believe the conditions are falling into place for the greenback to weaken even further in the coming months.”
Why UBS Expects the US Dollar to Weaken Further
The bank cites the combination of a high valuation, elevated deficits (mainly on the fiscal side), slower economic growth with a higher unemployment rate, and thus lower interest rates for the expected move lower. “We forecast a mid single-digit decline for the greenback over the next 12 months. Such a move would keep the USD in overvalued territory, but simply to a smaller degree,” UBS added.
Volatility Ahead for Currency Markets
The slide we anticipate is unlikely to be a straight line down, the bank added. While U.S. exceptionalism is set to end, macro data elsewhere has also been lackluster and is not expected to improve much in the near term. “Currency markets are therefore poised for volatility, such as what we saw in August. We favor currencies where growth is likely to hold up better, like in Australia or the U.K., and where rate cut expectations are too advanced like for Switzerland,” UBS added.
UBS's Recommendations for Investors
“We reiterate our message to hedge USD long exposure. Alternatively, investors can sell the USD’s upside potential for a yield pickup versus the EUR, GBP, CHF, or AUD.”
HSBC's Counter-Argument: The USD is Due for a Bounce
In contrast to UBS's bearish outlook, HSBC is looking for a bounce for the USD, saying that:
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The dollar looks to have weakened excessively relative to dovish expectation for Fed rate cuts
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Says the economy in the US does not warrant the market pricing of the rate of Fed easing (referring to expectations of 100bp of cuts by year end)
HSBC do not see a 50bp rate cut ahead.
The US Dollar's Future: A Balancing Act
The US dollar's future trajectory will likely depend on a balancing act between the Fed's rate cuts, the strength of the US economy, and global economic conditions. While UBS sees further weakening, HSBC anticipates a bounce back. Ultimately, the path of the US dollar will be shaped by a complex interplay of economic factors and market sentiment. It remains to be seen whether the greenback will continue its downward trend or rebound in the coming months.
