USD energy doesn’t essentially make greenback a purchase, UBS says

Investing.com — The US greenback has surged to two-year highs following the current US presidential election, reversing from its prior lows simply two months in the past.

Whereas the present energy of the dollar seems sturdy and market circumstances stay favorable, strategists at UBS warning that it could not current a compelling purchase alternative for traders.

The speedy rebound of the greenback has been pushed by stronger US financial information in comparison with different areas and heightened issues over world development. The greenback’s trajectory was additional bolstered by the re-election of Donald Trump, which lowered the probability of great US charge cuts.

This, coupled with world GDP development uncertainty, US tariff threats, and US yields staying “greater for longer,” implies that the forex’s energy could persist heading into 2025. Nonetheless, “it doesn’t essentially make the greenback a purchase,” UBS strategists led by Dominic Schnider mentioned.

The greenback has skilled a 6% rebound within the US Greenback Index from its September low, a transfer equal to roughly one normal deviation. Strategists spotlight that a lot of the optimistic information supporting the greenback seems to have already been factored into the market. Because of this, they advise towards pursuing additional greenback energy at this stage.

The group additionally factors to the restricted sustainability of the greenback’s present valuation, citing its “terribly wealthy valuation in trade-weighted phrases.”

“This makes the USD a promote for us on any extra spikes, in our view, somewhat than including to lengthy positions. Put in another way, we see worth in a contrarian bias for many forex pairs,” strategists mentioned.

On this context, the financial institution advocates for contrarian methods, favoring currencies just like the Japanese yen and Australian greenback, which may gain advantage from diverging financial insurance policies. Inside Europe, the British pound emerges as UBS’s high choose, supported by higher UK development prospects and better yields.

Rising market currencies additionally supply choose alternatives. UBS identifies the South African rand, Indian rupee, and Indonesian rupiah as enticing for whole returns, though commerce dangers stay an element for export-oriented currencies just like the Mexican peso and Canadian greenback.

Wanting forward, UBS foresees a 6% decline within the broad DXY over the medium time period, pushed by easing US yields and the diminishing advantages of Trump’s preliminary financial insurance policies.