UBS, a leading global financial services firm, forecasts further depreciation of the U.S. dollar due to narrowing interest rate differentials, U.S. fiscal deficit concerns, and changing global central bank strategies.
In a recent report from its Chief Investment Office, UBS stated, "We still expect the dollar to decline further in the coming months for several reasons."
Despite a brief rally following upward revisions in the second-quarter GDP growth to 3% and stronger consumer spending data, the dollar remains under pressure.
The U.S. dollar index (DXY) has fallen by 3% over the past month, remaining at the lower end of its range since early 2023.
UBS analysts believe the risks for the U.S. dollar are "skewed to the downside," suggesting that even favorable inflation or labor market data may not prevent a Federal Reserve rate cut in September, especially if the data underperforms expectations.
UBS highlighted that "interest rate differentials look set to narrow," as central banks like the Swiss National Bank and the European Central Bank may adopt more gradual approaches to rate changes compared to the Fed.
The firm also pointed out ongoing concerns over the U.S. fiscal deficit, which poses long-term risks to the currency’s value.
In light of these factors, UBS has adjusted its global investment strategy, downgrading the U.S. dollar to its "Least Preferred" status.
Concurrently, UBS has upgraded the euro, the British pound, and the Australian dollar to "Most Preferred," expecting these currencies to strengthen against the U.S. dollar over the forecast period.