The US dollar is anticipated to experience increased downward pressure in the upcoming months, despite a recent temporary boost from robust economic data. Analysts at UBS have expressed a pessimistic view regarding the greenback’s future, citing a combination of factors such as narrowing interest rate differentials, concerns about the growing US fiscal deficit, and evolving global monetary policies.
In line with these developments, UBS has made the decision to relegate the US dollar to its “Least Preferred” status in terms of global currency strategy, indicating a preference for other currencies like the euro, British pound, and Australian dollar. Although there was a slight uptick in the US dollar following the release of revised second-quarter GDP growth figures, the overall trend remains negative.
One of the primary factors expected to exert downward pressure on the US dollar is the projected narrowing of interest rate differentials. UBS forecasts that the US Federal Reserve will continue to decrease interest rates, anticipating a total reduction of 100 basis points over the course of the Fed’s remaining meetings in 2024. Other central banks, including the Swiss National Bank, the Bank of England, and the European Central Bank, are also expected to lower rates, albeit at a slower pace.
Additionally, apprehensions surrounding the US fiscal deficit are anticipated to further weaken confidence in the dollar. Projections from the Congressional Budget Office indicate that interest costs on US debt will surpass defense spending this year, underscoring the escalating fiscal challenges confronting the nation. As the US presidential race gains momentum, with Vice President Kamala Harris leading in polls, the fiscal deficit is likely to emerge as a pivotal point of contention, potentially creating additional obstacles for the dollar.
Global monetary policy shifts pose another hurdle for the US dollar. For instance, the Reserve Bank of Australia is expected to maintain its current policy stance until the following year, which could create additional pressure on the dollar. In contrast, the Swiss franc is predicted to remain robust due to its safe-haven status and the expected conclusion of the Swiss National Bank’s easing cycle in September.
UBS has projected that the euro, British pound, and Australian dollar will all strengthen against the US dollar by June 2025, with EURUSD at 1.16, GBPUSD at 1.38, and AUDUSD at 0.70. These expectations have significant implications for global markets, with risk assets like quality stocks becoming more appealing as the dollar depreciates, particularly in a scenario where the Federal Reserve is slashing rates.
UBS recommends that investors consider reallocating cash into high-quality bonds, particularly those issued by investment-grade companies, to capitalize on the evolving economic landscape. Despite some indications of weakness in the US labor market, such as a rise in unemployment in July, the overall economic outlook remains resilient. Weekly jobless claims have decreased, and consumer spending continues to demonstrate strength, assuaging concerns of an imminent recession.
The base case scenario envisioned by UBS points towards a soft landing for the US economy, bolstered by the anticipated rate cuts from the Federal Reserve. However, the broader picture suggests that the US dollar is poised to confront significant headwinds in the foreseeable future, necessitating a strategic approach for investors to navigate the evolving currency dynamics.