In a recent report, UBS’s investment division highlighted that narrowing interest rate differentials and rising concerns about the US budget deficit could put medium-term pressure on the US dollar. UBS notes that the dollar has already declined by 5% since June, driven by these factors.
UBS expects the US dollar to continue depreciating, in line with its previous forecasts, which predict a sustained downward trend in the US Dollar Index (DXY).
Interest Rate Policy Adjustments
The dollar’s strength has been largely supported by favorable interest rate differentials, but these are expected to narrow as global central banks tighten monetary policy. UBS also points to growing fiscal challenges in the US, noting that increased scrutiny in the run-up to elections may add further pressure on the currency.
In light of this, UBS advises investors with significant US dollar holdings to reassess their strategies. Recommended actions include hedging through futures or swaps and choosing currency-hedged share classes to mitigate potential losses from further dollar depreciation.
UBS also emphasizes the importance of diversifying into alternative currencies and assets for risk management. “Gold can be an effective diversifier,” notes UBS’s CIO, adding that the precious metal is expected to perform well if interest rates decline and geopolitical uncertainties continue.
Particular attention is given to the Swiss franc, which UBS identifies as a strong currency. The Swiss National Bank’s cautious approach to interest rate cuts, coupled with ongoing geopolitical tensions, has bolstered the franc’s position. UBS predicts that the franc, along with other major currencies like the euro, British pound, and Australian dollar, may offer more stability compared to the US dollar in the coming months.