Investing.com — The U.S. dollar (USD) has entered 2025 in impressive fashion, with the (DXY) reaching 110, its highest level since late 2022. According to UBS strategists, the currency’s upward momentum, fueled by robust U.S. economic data, is expected to continue through the first half of the year.
UBS points to several factors that determine the strength of the USD. Strong nonfarm payroll data and purchasing managers’ index data have bolstered US economic sentiment, while higher yields continue to support the dollar.
In contrast, macroeconomic conditions in other major economies remain mixed. Growth in Europe remains subdued, while China, despite forecast 5% annual growth in Q4 2024, faces challenges in offsetting USD momentum amid persistent US tariff risks.
“With US rate risks high, we believe stronger activity in China is unlikely to change investor sentiment and slow the USD rally,” UBS strategists led by Dominic Schnider said in a note.
“In our view, near-term USD strength is likely to continue in the first half of 25, with room for overshoot (DXY could potentially reach 115),” she added. Strategists also highlighted that increased speculative long positions in the dollar are dependent on continued strong US data to support valuation.
The difference in macroeconomic performance and monetary policy is also a crucial driver of the dollar’s strength.
While the US Federal Reserve is expected to maintain its current policy rate, other central banks, especially in the eurozone, are likely to cut rates further. This difference increases the potential for USD outperformance, with UBS forecasting the euro to trade below par with the dollar in the coming months.
Moreover, rate risks remain a key factor. Proposals for universal tariffs of up to 10% and targeted tariffs of up to 60% on Chinese imports could further increase the dollar’s appeal. “Much of the USD’s strength can be attributed to better macro data – so rate risks still have room to strengthen the USD in the near term,” strategists explained.
In this light, UBS expects the pair to fall below par in early 2025, while it is expected to fall below 1.20. The bank also revised its forecast for March 2025 to 0.93, up from a previous estimate of 0.89.
Looking ahead, UBS remains cautious in extrapolating USD strength throughout the year.
“We still think 2025 could be a tale of two halves: strength in the first half, and a partial or complete reversal in the second half,” the strategists said. “The fact that the USD is trading at its highest level in decades in a highly overvalued area and that investor positioning is high supports this story in our view.”
