Investing.com – The US dollar has been in mighty demand lately, reaching its highest level this year. However, UBS believes that this growth is unlikely to be sustained in the coming months.
At 08:05 ET (12:05 GMT), the dollar index, which tracks the dollar against a basket of six other currencies, was trading at 105.597, up about 1% in June and only slightly below the 2024 high ., amounting to 106.52, determined in April.
The strength reflects a combination of factors, including the fact that the Federal Reserve has kept interest rates high for an extended period of time while other major central banks — including , , and — have already started cutting, UBS analysts said in a June 27 note.
Since investors often see the US currency as a safe and sound haven, it has also likely benefited from political uncertainty surrounding the French parliamentary elections, the first round of which will be held this Sunday.
It is worth noting that the US dollar has gained about 14% against the yen since the beginning of the year, breaking through the 160 level this week, pushing the Japanese currency to its lowest level since 1986.
The euro, which is the largest currency on the DXY index, has also lost more than 3% of its value against the dollar in 2024.
Further upward pressure on the US dollar is possible in the near term.
If former US President Donald Trump is seen as having a better chance of winning the election after today’s first televised debate with President Joe Biden, it could strengthen the US currency, given the potential for fiscal easing if the Republican Party wins the White House and control of Congress.
The outcome of Sunday’s elections in France could also weaken the euro in the event of a mighty result for a right- or left-wing party.
However, the bank added that the recent weakening of the US dollar should ease in the coming months, as the slowdown in economic growth in the US will enable interest rate cuts to begin in September.
The dollar, which we believe is highly valued, should also face downward pressure as markets begin to price in a deeper rate-cutting cycle from the Federal Reserve.
Finally, concerns about the size of the U.S. budget deficit could prove to be another headwind in the longer term, UBS added.
