The US dollar is expected to face increasing downward pressure in the coming months, according to analysts at UBS. This bearish outlook is driven by a combination of factors, including narrowing interest rate differentials, concerns about the growing US fiscal deficit, and shifting global monetary policies. These factors have led UBS to downgrade the US dollar to “Least Preferred” in its global strategy, favoring currencies like the euro, British pound, and Australian dollar instead.
Despite the bearish outlook, the US dollar experienced a temporary boost after the release of revised second-quarter GDP growth figures. The revision showed a 3.0% annualized growth rate, up from the previously reported 2.8%, driven mainly by stronger consumer spending. This positive data helped the US dollar recover slightly from its recent decline, but it remains under pressure overall.
One of the key factors expected to weigh on the US dollar is the anticipated narrowing of interest rate differentials. The US Federal Reserve is projected to continue cutting interest rates, with a total reduction of 100 basis points across the Fed’s three remaining meetings in 2024. In contrast, other central banks are expected to reduce rates more gradually, making the dollar less attractive compared to other currencies. Concerns over the US fiscal deficit are also expected to erode confidence in the dollar, as interest costs on US debt are projected to surpass defense spending this year.
Global monetary policy shifts also pose a challenge for the US dollar. For example, the Reserve Bank of Australia is expected to maintain its current policy stance until next year, putting additional pressure on the dollar. On the other hand, the Swiss franc is expected to remain strong due to its safe-haven status and the Swiss National Bank’s anticipated conclusion of its easing cycle in September. UBS forecasts that the euro, British pound, and Australian dollar will all strengthen against the US dollar in the near future.
The anticipated weakening of the US dollar has significant implications for global markets. As the dollar depreciates, risk assets such as quality stocks are likely to become more attractive, especially in an environment where the Federal Reserve is cutting rates. UBS suggests that investors consider reallocating cash into high-quality bonds, particularly those from investment-grade companies, to take advantage of the changing economic landscape.
Despite some signs of weakness in the US labor market, such as an uptick in unemployment in July, the overall picture remains resilient. Weekly jobless claims have declined, and consumer spending continues to show strength, alleviating fears of an immediate recession. UBS maintains its base case for a soft landing for the US economy, supported by the expected rate cuts from the Fed.
The US dollar is facing increasing downward pressure due to a combination of factors, including narrowing interest rate differentials, concerns about the growing US fiscal deficit, and shifting global monetary policies. While recent positive economic data provided a temporary boost, the overall outlook remains bearish. Investors should consider the implications of a weakening dollar on global markets and adjust their strategies accordingly.