The U.S. Dollar is projected to weaken as the Federal Reserve gears up to ease monetary policy, according to UBS. The exchange rate, currently in the 1.10-1.15 range, is expected to climb above 1.15 by 2025. UBS advises investors to consider reducing USD exposure during any dips below 1.10 as a strategic adjustment to anticipated currency movements.
UBS foresees the Fed initiating its easing cycle in September with potentially more aggressive rate cuts compared to other central banks worldwide. The shift is attributed to inflation nearing targets, a softening labor market, and the conclusion of growth surpassing potential, signaling a shift away from highly restrictive monetary policy.
The brokerage firm notes that the past U.S. economic outperformance justified the Fed’s higher interest rates over the past three years. However, changing economic conditions are expected to diminish the period of “USD exceptionalism,” resulting in a broad weakening of the USD.
On the other hand, while Europe’s growth remains subdued, the ECB is not anticipated to deviate from its current path. UBS predicts that the ECB will gradually reduce rates by 25 basis points per quarter until mid-2025, a slower pace compared to the Fed. This relative advantage is seen as supportive of the euro.
Additionally, Europe’s trade balance surplus, which was impacted by the energy crisis in 2022, has returned to pre-crisis levels, further strengthening the euro. UBS’s analysis points towards a weakening USD and a bolstered euro in the coming years.