Investing.com – UBS has cut its long-term targets for the U.S. dollar, looking to outpace the currency’s rally as early as September.
At 08:45 ET (12:45 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, was down 0.1% at 101.655, after rising to a two-week high of 101.79 at the start of the week.
The pound rose 0.1% against the US dollar to 1.1048, after the pair fell to a two-week low earlier in the week.
Tuesday’s sharp decline on Wall Street did little to assuage market fears of negative seasonal patterns for September over the past decade, analysts at the Swiss bank said in a note dated Sept. 4.
With US employment data for August due out on Friday, it brought back memories of the markets’ gut-wrenching reaction to weak July employment data at the start of August and the subsequent collapse that saw the index rise to around 70.
The move also coincided with a classic burst of FX trading, with the Japanese yen and Swiss franc outperforming, while currencies such as the Australian dollar underperformed the US dollar, despite offering less trading at the time.
“What is different now is that although the VIX fell to 15 by the end of August, implied volatility in the FX market remained relatively high in classic carry pairs, and signs of fresh position accumulation were limited,” UBS added.
“We suspect this means any FX explosion will be more limited this time around even if weak US data again weakens equity markets significantly and US interest rates fall.”
As such, while the US dollar could also see a near-term recovery due to its positive seasonal patterns after a sharp sell-off in July and August, “we expect this recovery to be corrective in nature rather than continuing in the G10 space, and is likely to be the result of better-than-expected US data rather than a ‘risk-off’ move due to missed expectations.”
As a result, the Swiss bank took the opportunity to continue lowering its USD forecasts through the end of 2024 and 2025, and recommends taking advantage of the upward correction we expect this month to prepare for further structural USD weakness later.
“In particular, we now see EUR/USD hitting 1.12 by year-end and 1.15 by end-2025, with the decline of ‘US exceptionalism’ as the main driver of the revision, rather than any renewed enthusiasm for the euro,” UBS said.
“In fact, we continue to see the euro falling against most other currencies. We see political risks in both the US and Europe as unlikely to be major factors until there is greater transparency, leaving room for traditional macroeconomics.”
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