Investing.com — The U.S. dollar has risen to a two-year high following the recent U.S. presidential election, bouncing back from its previous low just two months ago.
While the dollar’s current strength appears robust and market conditions remain favorable, strategists at UBS warn that it may not provide a compelling buying opportunity for investors.
The dollar’s rapid recovery was driven by stronger US economic data compared to other regions and increased concerns about global growth. The dollar’s trajectory was further strengthened by the re-election of Donald Trump, reducing the likelihood of significant US interest rate cuts.
This, combined with uncertainty about global GDP growth, US tariff threats and US interest rates ‘staying higher for longer’, implies the currency’s strength could continue into 2025. “However, it doesn’t necessarily mean the dollar will become a buy,” UBS strategists say. led by Dominic Schnider said.
The dollar has experienced a 6% recovery from its September low, a move equivalent to about one standard deviation. Strategists emphasize that much of the positive news supporting the dollar appears to have already been absorbed into the market. As a result, they recommend not pursuing further dollar strengthening at this stage.
The team also points to the limited sustainability of the dollar’s current valuation, citing its “extremely rich valuation in trade-weighted terms.”
“We believe this makes the USD a buying asset for us on any additional spikes, rather than adding to long positions. In other words, we see value in a contrarian bias for most currency pairs,” strategists said.
In this context, the bank advocates contrarian strategies, favoring currencies such as the and , which could benefit from divergent monetary policy measures. Within Europe, the British emerge as the best choice for UBS, supported by better British growth prospects and higher interest rates.
Emerging market currencies also offer select opportunities. UBS views the South African , , and as attractive for total returns, although trade risks remain a factor for export-oriented currencies such as the and .
Looking ahead, UBS expects a 6% decline in the broad DXY over the medium term, driven by the easing of US yields and the diminishing benefits of Trump’s initial economic policies.
