Investing.com – Recent US economic data is positive, allowing the US dollar to regain some lost ground. But UBS warned that this outperformance should decline in 2025.
After two years of American exceptionalism, US economic data have reached a point where highly restrictive monetary policy no longer seems justified. Inflation is back on track and the labor market is starting to loosen to a point where it is unlikely to continue to exert material inflationary pressures, UBS said.
As a result, the Federal Reserve began cutting its key rate by 0.5 percentage points at its September meeting, “and we expect the central bank to move rates closer to neutral rates in the coming quarters,” said analysts at the Swiss bank . in a note dated October 17.
Falling interest rates in the US are likely to undermine the main driver of the USD. The fact that the US has paid the highest interest rates among the G10 countries in recent years and even higher interest rates than some emerging countries has allowed the US to finance its twin deficits.
However, the lower the US interest rate, the more attractive investments outside the US become in relative terms. The erosion of US yields should therefore lead to a partial reduction in the overvaluation of the USD.
“We expect the dollar to weaken by mid-single digits over the next twelve months,” UBS added, and “the most attractive USD alternatives are in the CHF, the GBP and the AUD.”
Switzerland has one of the lowest interest rates in the world, meaning the country won’t have to make much of austerity in a global easing cycle, the Swiss bank added.
“On a relative basis, this supports the CHF as yield differentials for the CHF become less negative. We expect the USDCHF to trade at 0.80 in 3Q25.”
In Britain and Australia, the mix of inflation and economic growth dynamics does not justify an aggressive easing cycle.
“Accordingly, yields in Britain and Australia, which are currently the highest in the G10, are likely to remain high and take pole position from the USD,” UBS said. “In a non-recessionary environment where risk-taking continues, there should be continued support for both GBP and AUD through 2025.”
and are expected to trade at 0.75 and 1.38 respectively in the second half of 2020.
At 09:15 ET (13:15 GMT), trading at 0.8658, AUD/USD at 0.6715 and GBP/USD at 1.3057.
