Investing.com – The U.S. dollar recently fell to its lowest level this year on growing expectations that the Federal Reserve will soon start cutting interest rates, with UBS predicting further declines.
The dollar index, which tracks the U.S. currency against a basket of six other currencies, was down 0.1% at 101.577 at 05:55 ET (09:55 GMT), after falling to 100.51 last week for the first time since July 2023.
“The dollar has generally lost ground against both risk-on and risk-averse currencies,” UBS analysts said in a note. “We believe conditions are favorable for further weakness in the greenback in the coming months.”
The bank cites a combination of high valuations, high deficits (mainly on the fiscal side), slower economic growth with a higher unemployment rate and, as a result, lower interest rates as the reason for the expected decline.
“We forecast a mid-single-digit decline for the US dollar over the next 12 months. Such a move would keep the dollar in overvalued territory, but simply to a lesser extent,” UBS added.
The decline we are forecasting is unlikely to be a straight line down, the bank added. While the US exception is set to end, macro data elsewhere has also been unimpressive and is not expected to improve much in the near future.
“Currency markets are therefore ripe for volatility like we saw in August. We favor currencies where growth is likely to hold up better, such as in Australia or the UK, and where expectations of interest rate cuts are too high, such as in Switzerland,” UBS added.
“We reiterate our message to hedge long USD exposure. Alternatively, investors could sell the upside potential of the USD to boost yields against EUR, GBP, CHF or AUD.”
