Dollar set for further losses

Investing.com – The U.S. dollar recently fell to its lowest level this year amid growing expectations that the Federal Reserve will soon start cutting interest rates, and UBS expects more losses to come.

At 05:55 ET (09:55 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, was down 0.1% at 101.577, after falling to 100.51 last week for the first time since July 2023.

“The dollar has lost ground broadly against risk-on and risk-off currencies alike, and we believe conditions are ripe for further dollar weakness in the coming months,” UBS analysts said in a note.

The bank cites a combination of high valuation, high deficits (especially on the fiscal side), slowing economic growth with high unemployment, and thus low interest rates, as reasons for the expected move down.

“We expect a mid-single-digit decline in the US dollar over the next 12 months. Such a move would keep the US dollar in overvalued territory, but to a lesser extent,” UBS added.

The bank added that the decline we expect is unlikely to be a straight downward trend. While the US exceptionalism is set to end, macro data elsewhere has also been lackluster and is not expected to improve much in the near term.

“FX markets are therefore set for volatility, as we saw in August,” UBS added. “We favour currencies where growth is likely to hold up better, such as Australia or the UK, and where interest rate cut expectations are well advanced, such as Switzerland.”

“We reiterate our message to hedge long exposure to the US dollar. Alternatively, investors can sell the potential for US dollar appreciation to increase yield against the euro, sterling, Swiss franc or Australian dollar.”

DollarLossesSet