UBS Forecasts Continued Weakening of US Dollar

UBS, a global financial services firm, released a report on Friday from its Chief Investment Office indicating that the U.S. dollar is likely to face further depreciation.

UBS predicts further depreciation of the U.S. dollar due to narrowing interest rate differentials, ongoing U.S. fiscal deficit concerns, and a shift in global central bank strategies. Despite a brief rally, UBS has downgraded the U.S. dollar to its Least Preferred status, while upgrading the euro, British pound, and Australian dollar.

UBS Forecasts Continued Weakening of US Dollar

Banking giant UBS has predicted a further depreciation of the U.S. dollar. In a report published on Friday, the firm’s Chief Investment Office stated that the dollar is likely to face continued weakness over the next few months due to several key factors.

“We still expect the dollar to decline further in the coming months for several reasons,” the report reads.

Despite a brief rally following revised second-quarter GDP growth figures — raised to an annualized rate of 3% from 2.8% — and stronger consumer spending data, the U.S. dollar remains vulnerable, UBS noted.

The U.S. dollar index (DXY), which measures the value of the greenback against a basket of six foreign currencies, has decreased by 3% over the past month, largely remaining in the lower end of its range since the beginning of 2023. However, some analysts anticipated a potential rally in the dollar.

“The balance of risks for the USD appears skewed to the downside,” the report explained, adding that even positive inflation or labor market data may not deter the Federal Reserve from considering a rate cut in September, especially if the indicators fall below expectations.

According to UBS, several factors are poised to put further pressure on the dollar. “Interest rate differentials look set to narrow,” the financial services firm stated. While the Federal Reserve is expected to continue cutting rates, central banks such as the Swiss National Bank and the European Central Bank are likely to adopt more gradual approaches.

Furthermore, UBS highlighted that “the U.S. fiscal deficit remains a concern,” especially in terms of the long-term risks for the currency.

In response to these dynamics, the UBS Chief Investment Office has adjusted its global strategy: “Against this backdrop, we recently shifted the U.S. dollar to Least Preferred in our global strategy and moved the euro, the British pound, and the Australian dollar to Most Preferred.”

“We expect all of them to regain ground against the U.S. dollar over our forecast horizon,” the report adds.

What do you think about UBS’s forecast for the U.S. dollar’s depreciation and the potential rise of other currencies? Let us know in the comments section below.