Dollar set for further losses

Investing.com – The U.S. dollar has recently fallen to the lowest level this year on raised expectations that the Federal Reserve will shortly start cutting interest rates, and UBS sees further losses ahead.

At 05:55 ET (09:55 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower to 101.577, after sinking as low as 100.51 last week for the first time since July 2023.

“The dollar has given up ground on a broad basis versus risk-on and risk-off currencies alike,” said analysts at UBS, in a note, and “we believe the conditions are falling into place for the greenback to weaken even further in the coming months.”

The bank cites the combination of a high valuation, elevated deficits (mainly on the fiscal side), slower economic growth with a higher unemployment rate, and thus lower interest rates for the expected move lower.

“We forecast a mid single-digit decline for the greenback over the next 12 months. Such a move would keep the USD in overvalued territory, but simply to a smaller degree,” UBS added.

The slide we anticipate is unlikely to be a straight line down, the bank added. While U.S. exceptionalism is set to end, macro data elsewhere has also been lackluster and is not expected to improve much in the near term.

“Currency markets are therefore poised for volatility, such as what we saw in August. We favor currencies where growth is likely to hold up better, like in Australia or the U.K., and where rate cut expectations are too advanced like for Switzerland,” UBS added.

“We reiterate our message to hedge USD long exposure. Alternatively, investors can sell the USD’s upside potential for a yield pickup versus the EUR, GBP, CHF, or AUD.”