UBS indicated on Tuesday that a slowing US economy could lead to a weaker US dollar as the Federal Reserve could ease monetary policy. For investors, UBS expects the exchange rate, which ranges between 1.10 and 1.15, to rise above 1.15 by 2025.
The brokerage firm suggests that any dip below 1.10 could be an opportunity to reduce exposure to the USD, implying a strategic adjustment in response to expected currency movements.
UBS expects the Fed to begin its easing cycle in September, with rate cuts potentially more aggressive than those of its global peers.
This shift is expected due to inflation moving towards targets, a weakening labor market and the end of growth above potential levels, which according to UBS no longer justifies a highly restrictive monetary policy.
UBS’s outlook suggests that U.S. economic outperformance relative to other countries over the past three years justified the Fed’s higher interest rates. However, changing economic conditions in the US will put an end to the period of ‘USD exceptionalism’ that kept the dollar at a high level.
The company expects the combination of these domestic factors to contribute to a broad weakening of the USD.
In contrast, European growth remains weak, but not to the extent that the European Central Bank (ECB) is expected to change its current course.
UBS predicts that the ECB will cut rates by 25 basis points per quarter throughout the year and possibly until mid-2025. The ECB’s less aggressive approach compared to the Fed’s expected cuts is seen as a relative advantage for the euro.
Moreover, the trade balance surplus in Europe, which previously supported the euro, has returned to pre-Ukrainian war levels, after a temporary deficit due to the energy crisis in 2022. This trade balance recovery is again seen as a factor strengthens the economy. the euro.
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