The US dollar is facing increasing downward pressure in the upcoming months, with analysts at UBS expressing a bearish outlook for the greenback. This negative forecast is driven by multiple factors, including narrowing interest rate differentials, concerns over the growing US fiscal deficit, and shifting global monetary policies. As a result, UBS has downgraded the US dollar to “Least Preferred” in its global strategy, favoring other currencies such as the euro, British pound, and Australian dollar.
Despite a recent boost from stronger-than-anticipated economic data, the US dollar remains under pressure. The release of revised second-quarter GDP growth figures showed an upward revision to a 3.0% annualized growth rate from the previously reported 2.8%. This positive data, driven mainly by stronger consumer spending, helped the US dollar recover slightly. However, the US dollar index has still fallen by 3% over the past month and continues to hover near the lower end of its range since early 2023.
One of the primary 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. On the other hand, other central banks, such as the Swiss National Bank, the Bank of England, and the European Central Bank, are also expected to reduce rates but at a more measured pace, potentially making their currencies more attractive.
Concerns over the US fiscal deficit are also expected to erode confidence in the dollar. The Congressional Budget Office has projected that interest costs on US debt will surpass defense spending this year, highlighting the growing fiscal challenges facing the country. As the US presidential race heats up, the fiscal deficit is likely to become a focal point of debate, which could create additional headwinds for the dollar.
Global monetary policy shifts further complicate the outlook for the US dollar. For instance, the Reserve Bank of Australia is expected to maintain its current policy stance until next year, potentially adding pressure on the dollar. In contrast, the Swiss franc is expected to remain strong due to its safe-haven status and the anticipated conclusion of its easing cycle by the Swiss National Bank in September. UBS forecasts that the euro, British pound, and Australian dollar will all strengthen against the US dollar by June 2025.
The anticipated weakening of the US dollar has significant implications for global markets. As the dollar depreciates, risk assets such as quality stocks are likely to become more attractive, especially in an environment where the Federal Reserve is cutting rates. UBS suggests that investors consider reallocating cash into high-quality bonds, particularly those from investment-grade companies, to take advantage of the changing economic landscape.
Despite some signs of weakness in the US labor market, such as an uptick in unemployment in July, the overall economic picture remains resilient. Weekly jobless claims have declined, and consumer spending continues to show strength, alleviating fears of an immediate recession. UBS maintains its base case for a soft landing for the US economy, supported by the expected rate cuts from the Fed.
The US dollar is expected to face continued downward pressure in the coming months, with multiple factors contributing to its weakness. Investors and market participants will need to closely monitor developments in interest rates, fiscal policy, and global monetary policies to navigate the shifting landscape of the currency markets.