Investing.com-The US dollar has been on a tear since slow September 2024, and UBS believes this short-term strength is likely to continue into the first half of the New Year, with room to exceed.
At 06:15 ET (11:15 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, was trading 0.5% lower but had gained almost 4% over the past year.
Better incoming US data (Nonfarm Managers Index and Purchasing Managers Index) – and with it the US gives rise – provided broad dollar support, analysts at UBS said in a note.
Economic news elsewhere has been rather mixed, and growth prospects for Europe remain very subdued. Accelerating growth in China suggests growth beyond the US. But with the risk of US tariffs looming, stronger activity in China is unlikely to shift investor sentiment and our rally has stalled in the USD rally.
He added that in the near future it seems that in the Swiss bank added that in the Swiss bank.
“American exceptionalism seemed to be asserting itself, with U.S. economic data likely to remain strong in the near term and risks U.S. inflation rising again. Recent growth and inflation dynamics have raised expectations for U.S. growth and inflation, which may allow the Fed to sustain into 2025.”
At least in short-term markets, they are likely to think this way, while other key central banks are likely to cut rates.
The potential for monetary policy divergence is a powerful driver, leading to trending FX markets and the potential for exchange rate overshoots.
US tariffs are also approaching a gigantic one, weighing sentiment. The problem with tariffs is that they will have inflationary consequences. Given that the scars of inflation are still fresh on investors’ minds, it dominates the market narrative.
“That said, we believe the US policy rate of 4-4.5% remains restrictive and represents a tailwind to economic growth and inflation. “This is unlikely to change the absence of hard evidence that productivity is rising in the United States, which may be the case given AI developments and related investments,” the Swiss bank added.
It appears that the market-friendly parts of Trump’s fresh agenda (e.g., tariffs, trade tensions, immigration) are easier to implement and more likely to occur before the market-friendly parts (e.g., tax cuts, deregulation).
“We believe the negative impact on U.S. growth is not priced in at all in the forex market, which cannot be said for the rest of the world, especially in Europe,” UBS said.
“Therefore, we still believe that 2025 may be a story of two halves – a great longitude in 1H and a partial or full reversal in 2H. The fact that the USD is trading at multi-decadal highs in highly inflated territory and that investor positioning (as well as speculative accounts in the futures market) is elevated.
