Investing.com — The dollar has started the year on the upswing, flirting with multi-decade highs, but UBS strategists are backing a turnaround in the second half of the year as the dollar is now in overvalued territory.
“While the USD has strengthened further in 2025, we still believe that 2025 will be a tale of two halves: a strong USD in the first half, and a partial or complete reversal in the second half,” UBS strategists said in their latest market outlook.
The call for a softer dollar in the second half of the year comes as the index has risen about 9% since late September, recently trading above the 110 level and taking the dollar to frothy levels.
“The USD currently trading in highly overvalued territory for almost decades, and increased investor positioning (with CFTC futures showing the highest level of net dollar length since 2015) support this narrative,” the strategists said.
The dollar’s strength is driven by better-than-expected US economic data, including nonfarm payrolls and the services purchasing managers’ index, which have led to lower expectations for Federal Reserve rate cuts this year.
While markets continue to reprice the Fed’s rate cuts, with consensus now on just one rate cut this year, UBS said it still expects two cuts. “We still expect the Fed to cut rates twice this year, for a total of 50 basis points of easing, but don’t expect these cuts until the second and third quarters,” the strategists said.
In the short term, however, US exceptionalism will likely continue to support the dollar, they add, and economic data will remain strong.
With less than a week to go until the inauguration of President-elect Donald Trump, UBS has highlighted the potential of new tariffs to give the dollar a lift. “Rate risks do not appear to be fully priced in,” the strategists noted.
