UBS says a sturdy start to the year is expected to reverse course in the second half of the year

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Investing.com — The dollar started the year in positive territory, flirting with multi-decade highs, but UBS strategists favor a reversal in the second half of the year as the dollar is now in overvalued territory.

“While the US dollar continued to strengthen in 2025, we continue to believe that 2025 will be a two-halves year – USD strength in the first half and a partial or complete reversal in the second half of the year,” UBS strategists said in their latest market forecasts .

The call for a weaker dollar in the second half of the year comes as the index has strengthened about 9% since slow September, recently trading above 110 and pushing the dollar to frothy levels.

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“Currently, USD prices close to the highest values ​​in many decades in a highly overvalued territory and the increased position of investors (CFTC futures contracts show the highest level of net dollar long since 2015) confirm this narrative,” the strategists said.

The dollar’s strength is driven by better-than-expected U.S. economic data, including non-farm payrolls data and the Services Purchasing Managers’ Index, which led to lower expectations for Federal Reserve rate cuts this year.

While markets continue to price in Fed rate cuts, with the consensus for just one rate cut this year, UBS said it still expects two cuts. “We still expect the Fed to cut rates twice this year, for a total of 50 basis points, but we don’t expect those cuts until the second and third quarters,” the strategists said.

However, in the near future, US exceptionalism will likely continue to support the dollar, they added, and economic data will remain sturdy.

With less than a week until President-elect Donald Trump’s inauguration, UBS saw the potential for fresh tariffs to boost the dollar. “The tariff risk does not appear to have been fully addressed,” the strategists noted.

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