On Tuesday, UBS noted that a slowing US economy could weaken the US dollar as the Federal Reserve may begin to ease monetary policy. For investors, UBS sees the exchange rate, which has been in a range of 1.10-1.15, rising above 1.15 by 2025.
The brokerage notes that any dips below 1.10 could be an opportunity to reduce exposure to the US dollar, meaning a strategic adjustment in response to expected currency movements.
UBS expects the Federal Reserve to begin its monetary policy easing cycle in September, with likely more aggressive rate cuts than those of its global peers.
This shift is expected to happen due to inflation moving towards targets, a weak labor market, and the end of above-potential growth, which UBS believes no longer justifies tight monetary policy.
UBS forecasts that the US economy’s outperformance over the past three years justifies a rate hike by the Federal Reserve. However, changing economic conditions in the US are set to end the period of “USD exceptionalism” that has kept the dollar at high levels.
The company expects the combination of these domestic factors to contribute to a broad-based weakening of the US dollar.
In contrast, growth in Europe remains weak, but not to the point where the European Central Bank is forced to change course.
UBS expects the European Central Bank to cut interest rates by 25 basis points each quarter throughout the year and possibly until mid-2025. The ECB’s less aggressive approach compared to the expected cuts by the Fed is seen as a relative advantage for the euro.
Moreover, Europe’s trade surplus, which had previously supported the euro, has returned to pre-Ukraine war levels after a temporary deficit caused by the energy crisis in 2022. This trade balance recovery is again seen as a factor strengthening the euro.
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