The US Dollar Faces Downward Pressure Despite Economic Boost
The US dollar is expected to face increasing downward pressure in the coming months, according to analysts at UBS. Factors such as narrowing interest rate differentials, concerns about the growing US fiscal deficit, and shifting global monetary policies are driving this bearish outlook for the greenback. UBS has downgraded the US dollar to “Least Preferred” in its global strategy, favoring currencies like the euro, British pound, and Australian dollar instead.
While the US dollar saw a slight gain after the release of revised second-quarter GDP growth figures, it remains under pressure. The recent positive data helped the dollar recover slightly, but it has still fallen by 3% over the past month. UBS analysts maintain that the broader outlook for the dollar is negative, with several factors likely to push it lower in the coming months.
One of the key factors expected to weigh on the US dollar is the anticipated narrowing of interest rate differentials. The US Federal Reserve is projected to continue cutting interest rates, with UBS forecasting a total reduction of 100 basis points across the Fed’s three remaining meetings in 2024. This, coupled with concerns over the US fiscal deficit and global monetary policy shifts, is expected to further erode confidence in the dollar.
UBS forecasts that the euro, British pound, and Australian dollar will all strengthen against the US dollar by June 2025. The weakening US dollar has significant implications for global markets, with risk assets like quality stocks becoming more attractive. UBS suggests investors consider reallocating cash into high-quality bonds to take advantage of the changing economic landscape.
Despite some signs of weakness in the US labor market, the overall picture remains resilient. UBS maintains its base case for a soft landing for the US economy, supported by expected rate cuts from the Fed. As the US dollar continues to face downward pressure, investors should be prepared for potential shifts in the global financial landscape.