US greenback to remain stronger for longer, UBS says

Investing.com — UBS strategists anticipate the US greenback “to remain stronger for longer,” citing sturdy US financial exercise and ongoing tariff issues impacting different areas.

Monday noticed the US greenback index (DXY) soar to its highest degree since November 2022, buying and selling above the 110 mark through the session. This represents a roughly 9% appreciation since late September.

The US greenback’s current energy has been bolstered by better-than-expected home knowledge, together with nonfarm payrolls and the companies sector buying managers’ index. These optimistic indicators have led to a lower within the anticipated variety of Federal Reserve charge cuts this 12 months, with the resultant rise in US yields lending broad help to the USD.

Whereas US financial knowledge is anticipated to stay strong within the close to time period, the outlook for Europe is much less optimistic, with subdued development prospects.

Though development in China is forecasted to speed up to five% year-over-year for the fourth quarter, the specter of US tariffs poses a major threat. Political and financial uncertainties in South Korea, the European Union, and the UK have been linked to weak point of their respective currencies.

In accordance with UBS, potential financial coverage divergence is among the many key elements that might additional propel the greenback upward within the close to time period.

Whereas the Fed is anticipated to chop charges by a complete of fifty foundation factors within the second and third quarters, the European Central Financial institution is projected to scale back charges by 100 foundation factors within the first half of the 12 months.

“Coverage divergence is a robust driver of currencies, which results in trending FX markets and the potential for overshooting trade charges,” strategists led by Mark Haefele wrote.

The agency additionally factors out that tariff dangers might not be absolutely accounted for within the present USD valuation. Regardless of the greenback’s current rally being largely attributed to strong US macroeconomic knowledge, the introduction of recent tariffs might drive the greenback even increased.

UBS means that if tariffs are applied, the DXY might commerce between 110 and 115, with important impacts on different main forex pairs.

“If tariffs had been to materialize, DXY might commerce in a 110-115 vary, EUR/USD might drop beneath parity, GBP/USD might slide beneath 1.20, and USD/CHF might transfer towards 0.94, in our view,” strategists famous. 

Nonetheless, the funding financial institution believes that the story of 2025 might be a story of two halves, with the greenback energy within the first half of the 12 months doubtlessly reversing within the second half.

The present buying and selling place of the USD, which is taken into account strongly overvalued and reveals the best degree of greenback internet size since 2015, helps this view.

UBS’s revised forecasts for the EUR/USD pair mirror this anticipated trajectory. Strategists anticipate the pair to commerce at 1.00 in March, 1.02 in June, and 1.06 in December 2025.

Within the case of China, regardless of the potential of dramatically increased efficient tariff charges, the CNY has solely partially priced on this threat, with UBS reiterating its forecast for the USDCNY to achieve 7.50 by June.