The recent analysis from UBS paints a bleak picture for the US dollar, indicating that it is expected to face increasing downward pressure in the coming months. Despite a temporary boost from stronger-than-anticipated economic data, the outlook for the greenback remains bearish. This is driven by a combination of factors including narrowing interest rate differentials, concerns about the growing US fiscal deficit, and shifting global monetary policies.
The US dollar index has already fallen by 3% over the past month and continues to hover near the lower end of its range since early 2023. While a recent revision to the second-quarter GDP growth figures provided a slight reprieve for the US dollar, it is clear that the broader outlook remains negative. The revised GDP figures were mainly driven by stronger consumer spending, pointing towards some resilience in the US economy.
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 likely to continue cutting interest rates, with projections indicating a total reduction of 100 basis points across the Fed’s three remaining meetings in 2024. In contrast, other central banks such as the Swiss National Bank, the Bank of England, and the European Central Bank are expected to reduce rates at a more measured pace, making their currencies more attractive.
Moreover, concerns over the US fiscal deficit are expected to erode confidence in the dollar further. The Congressional Budget Office has projected that interest costs on US debt will surpass defense spending this year, highlighting the significant fiscal challenges facing the country. As the US presidential race heats up, the fiscal deficit is likely to become a focal point of debate, potentially creating additional headwinds for the dollar.
Global monetary policy shifts also pose a challenge for the US dollar. For instance, the Reserve Bank of Australia is expected to maintain its current policy stance until next year, which could add pressure on the dollar. In contrast, the Swiss franc is expected to remain strong due to its safe-haven status and the Swiss National Bank’s anticipated conclusion of its easing cycle in September. UBS forecasts that currencies like the euro, British pound, and Australian dollar will 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 capitalize on the changing economic landscape.
Despite some signs of weakness in the US labor market, such as an uptick in unemployment in July, the overall 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 future of the US dollar appears to be fraught with challenges. While there may be temporary boosts from positive economic data, the broader outlook remains negative due to a combination of factors working against the greenback. Investors and policymakers alike will need to closely monitor developments in the coming months to navigate the shifting landscape of the global economy.