Investing.com — The U.S. dollar is expected to face increasing downward pressure in the coming months, despite a recent boost from stronger-than-expected economic data.
According to analysts at UBS, the outlook for the dollar remains bearish, driven by a combination of narrowing interest rate differentials, concerns about the growing US budget deficit and shifting global monetary policy.
In light of these factors, UBS has downgraded the US dollar to Least Preferred in its global strategy, instead favoring currencies such as the euro, British pound and Australian dollar.
The US dollar gained some ground on Thursday after the release of revised second-quarter GDP growth figures.
“Meanwhile, second-quarter GDP was revised upward to annual growth of 3.0% from the previously reported 2.8%, mainly driven by stronger consumer spending,” the analysts said.
This revision was largely driven by stronger consumer spending, which also saw an upward adjustment from the initial 2.3% to 2.9% annually.
These positive data helped the US dollar recover somewhat, but remains under pressure. Rates have fallen 3% in the past month and have continued to hover near the lower end of their range since early 2023.
Despite this temporary reprieve, UBS analysts remain of the view that the broader outlook for the dollar is negative, with several factors likely to push it lower in the coming months.
One of the main factors expected to weigh on the US dollar is the expected narrowing of interest rate differentials.
The US Federal Reserve is likely to continue cutting interest rates, with UBS predicting a total cut of 100 basis points over the Fed’s three remaining meetings in 2024.
While other central banks, including the Swiss National Bank, the Bank of England and the European Central Bank, are also expected to cut rates, their approach is likely to be more muted.
This slower pace of austerity abroad could make the dollar less attractive compared to other currencies.
In addition to the interest rate outlook, concerns about the US budget deficit are expected to further erode confidence in the dollar. The Congressional Budget Office has projected that interest costs on U.S. debt will exceed defense spending this year, highlighting the growing budget problems facing the country.
As the race for the US presidency heats up and Vice President Kamala Harris is currently leading in the polls, the budget deficit is likely to become a central talking point, potentially creating additional headwinds for the dollar.
Global monetary policy shifts also pose a challenge to the US dollar. For example, the Reserve Bank of Australia is expected to maintain its current policy stance until next year, which could increase pressure on the dollar.
In contrast, the Swiss franc is expected to remain strong due to its safe-haven status and the expected completion of the easing cycle by the Swiss National Bank in September.
UBS predicts that the euro, British pound and Australian dollar will all appreciate against the US dollar by June 2025, by 1.16, 1.38 and 0.70.
The expected weakening of the US dollar has significant consequences for global markets. As the dollar depreciates, risky assets such as quality stocks are likely to become more attractive, especially in an environment where the Federal Reserve is cutting interest rates.
UBS suggests investors consider reallocating cash to high-quality bonds, especially those of investment-grade companies, to take advantage of the changing economic landscape.
Despite some signs of weakness in the US labor market, such as a rise in unemployment in July, the overall picture remains resilient. Weekly jobless claims have declined and consumer spending remains strong, easing fears of an immediate recession.
UBS maintains its base case for a soft landing for the US economy, supported by expected Fed rate cuts.
