Investing.com – The US greenback has been on a tear since its late-September 2024 lows, and UBS thinks this near-term energy is prone to persist within the first half of the brand new 12 months, with room to overshoot.
At 06:15 ET (11:15 GMT), the Greenback Index, which tracks the dollar in opposition to a basket of six different currencies, traded 0.5% decrease, however has gained virtually 4% over the course of the final 12 months.
Higher incoming US information (nonfarm payrolls and buying managers’ index)—and with it, US yields transferring increased—have supplied broad greenback assist, analysts at UBS stated, in a word.
Financial information elsewhere has been relatively blended, with development prospects for Europe staying extremely subdued. Accelerating development in China suggests that there’s development exterior the US. However with US tariff dangers looming massive, stronger exercise in China is unlikely to shift investor sentiment and stall the USD rally, in our view.
Within the close to time period, there appear to be restricted headwinds holding the USD again, the Swiss financial institution added.
“US exceptionalism has appeared to reassert itself, with US financial information prone to keep sturdy within the close to time period and dangers to US inflation transferring increased once more. The most recent development and inflation dynamics have lifted US development and inflation expectations, which may enable the Fed to remain on maintain in 2025.”
Not less than within the brief run markets are prone to suppose this manner, whereas different key central banks are prone to minimize charges additional.
The potential for financial coverage divergence is a robust driver, which ends up in trending FX markets and the potential for overshooting trade charges.
US tariffs are additionally looming massive, weighing on sentiment. The priority on tariffs is that they may have inflationary penalties. Given inflation scarring remains to be recent on traders’ minds, it’s dominating market narratives.
“That stated, we predict {that a} coverage price of 4-4.5% within the US stays restrictive and is a headwind to financial development and inflation. That is unlikely to vary absent laborious proof that productiveness is rising within the US, which can occur given developments in AI and related funding,” the Swiss financial institution added.
It seems that the market-unfriendly components of the brand new Trump agenda (e.g., tariffs, commerce tensions, immigration) are simpler to implement and extra prone to occur earlier than the market-friendly components (e.g., tax cuts, deregulation).
“We predict a damaging influence on US development will not be priced in any respect within the foreign exchange market, which can’t be stated for the remainder of the world, notably Europe,” UBS stated.
“Therefore, we nonetheless suppose that 2025 could possibly be a narrative of two halves—energy in 1H, and partial or full reversal in 2H. The truth that the USD is buying and selling at multi-decade highs in strongly overvalued territory and that investor positioning (like speculative accounts within the futures market) is elevated underpin this narrative.”
