Investing.com – The latest US economic data is on the upswing, helping the US dollar regain some of its lost territory. However, UBS warned that this outperformance is expected to fade in 2025.

After two years of US exceptionalism, US economic data has reached the point where highly restrictive monetary policy no longer seems justified. Inflation has returned to target and the labor market has begun to loosen to a point where it is unlikely to exert significant inflationary pressure anymore, UBS said.

As a result, the Federal Reserve at its September meeting began reducing the key interest rate by 0.5 percentage points “and we expect the central bank to bring the rate closer to the neutral rate in the coming quarters,” analysts at the Swiss bank said in a note dated October 17.

Falling interest rates in the US are likely to weaken the most significant driver of the USD. The fact that in recent years the United States has paid the highest interest rates among G10 countries, and even higher interest rates than some emerging market countries, has allowed the United States to finance its twin deficits.

However, the lower the yield in the US, the more attractive investment outside the US becomes, in relative terms. The erosion of yields in the US should therefore lead to a partial reduction in the overvaluation of the USD.

“We expect the dollar to weaken by mid-single digits over the next 12 months,” UBS added, and “the most attractive alternatives to USD can be found in CHF, GBP and AUD.”

Switzerland has some of the lowest interest rates in the world, which means there is little to cut in the global monetary easing cycle, the Swiss bank added.

“On a relative basis, this supports CHF as yield differentials for CHF become less negative. We expect the USDCHF rate to be 0.80 in the third quarter of 2025.”

In the UK and Australia, the combination of inflation and economic growth dynamics does not justify an aggressive cycle of monetary easing.

“As a result, yields in the UK and Australia, which are currently the highest in the G10, are likely to remain high, leading the way against the USD,” UBS said. “In a recession-free environment where risk-taking continues, there should be continued support for both GBP and AUD through 2025.”

and are expected to be 0.75 and 1.38, respectively, in the second half of 2025.

At 09:15 ET (13:15 GMT), the rate was 0.8658, AUD/USD 0.6715 and GBP/USD 1.3057.