Investing.com — UBS strategists expect the U.S. dollar to “appreciation for an extended period of time,” citing strong economic activity in the U.S. and continued tariff concerns affecting other regions.
On Monday, (DXY) soared to its highest price since November 2022, trading above the 110 mark during trading. This represents an increase of about 9% since late September.
The recent strength of the dollar has been supported by better-than-expected domestic data such as non-farm payrolls and the services sector purchasing managers index. These positive indicators have led to a reduction in the number of Federal Reserve rate cuts expected this year, resulting in higher US yields and providing broad support for the US dollar.
While US economic data is expected to remain strong in the short term, the outlook for Europe is less optimistic, with growth prospects slowing.
China's growth rate is expected to accelerate to 5% year-on-year in the fourth quarter, but the threat of U.S. tariffs poses a significant risk. Political and economic uncertainties in South Korea, the European Union, and the United Kingdom are associated with depreciation of their respective currencies.
According to UBS, potential monetary policy differences are one of the key factors that could push the dollar further higher in the short term.
The Fed is expected to cut rates by a total of 50 basis points in the second and third quarters, while the European Central Bank is expected to cut rates by 100 basis points in the first half of this year.
“Policy divergence is a strong currency driver, leading to currency market trends and the potential for exchange rate overshoots,” said strategists led by Mark Hefele.
The company also notes that the current USD valuation may not fully take into account tariff risks. The dollar's recent strength is largely due to strong macroeconomic indicators in the United States, but the introduction of new tariffs could push the dollar further.
UBS suggests that if tariffs are implemented, DXY could trade between 110 and 115, which could have a significant impact on other major currency pairs.
“If tariffs materialize, DXY could trade in the $110-$115 range, with a potential move below parity, below 1.20, and toward 0.94,” the strategists wrote.
However, the investment bank believes the story of 2025 could be a tale of two halves, with dollar strength in the first half of the year potentially reversing in the second half.
The current USD trading position is believed to be highly overvalued, with USD net length at its highest level since 2015, supporting this view.
UBS's revised forecast for the EUR/USD pair reflects this expected trajectory. Strategists expect the pair to trade at 1.00 in March 2025, 1.02 in June and 1.06 in December 2025.
In the case of China, although the effective tariff rate could rise dramatically, the renminbi only partially incorporates this risk, and UBS predicts that the effective tariff rate will reach 7.50 by June. He reiterated his outlook that this will happen.
