Investing.com — The US greenback is predicted to face rising downward strain within the coming months, regardless of a latest enhance from stronger-than-anticipated financial information.
As per analysts at UBS, the outlook for the buck stays bearish, pushed by a mixture of narrowing rate of interest differentials, issues concerning the rising US fiscal deficit, and shifting international financial insurance policies.
In mild of those components, UBS has downgraded the US greenback to “Least Most well-liked” in its international technique, favoring currencies just like the euro, British pound, and Australian greenback as an alternative.
Thursday noticed the US greenback achieve some floor after the discharge of revised second-quarter GDP progress figures.
“In the meantime, second-quarter GDP was revised upward to a 3.0% annualized progress charge from the beforehand reported 2.8%, pushed primarily by stronger shopper spending,” the analysts stated.
This revision was largely pushed by stronger shopper spending, which additionally noticed an upward adjustment to a 2.9% annualized charge from the preliminary 2.3%.
This optimistic information helped the US greenback recuperate barely, nevertheless it stays below strain. The has fallen by 3% over the previous month and continues to hover close to the decrease finish of its vary since early 2023.
Regardless of this short-term reprieve, UBS analysts preserve that the broader outlook for the greenback is unfavorable, with a number of components prone to push it decrease within the coming months.
One of many key components anticipated to weigh on the US greenback is the anticipated narrowing of rate of interest differentials.
The US Federal Reserve is prone to proceed chopping rates of interest, with UBS projecting a complete discount of 100 foundation factors throughout the Fed’s three remaining conferences in 2024.
Whereas different central banks, together with the Swiss Nationwide Financial institution, the Financial institution of England, and the European Central Financial institution, are additionally anticipated to scale back charges, their method is prone to be extra measured.
This slower tempo of cuts overseas may make the greenback much less enticing in comparison with different currencies.
Along with the rate of interest outlook, issues over the US fiscal deficit are anticipated to additional erode confidence within the greenback. The Congressional Funds Workplace has projected that curiosity prices on US debt will surpass protection spending this yr, highlighting the rising fiscal challenges going through the nation.
Because the US presidential race intensifies, with Vice President Kamala Harris presently main within the polls, the fiscal deficit is prone to develop into a focus of debate, doubtlessly creating further headwinds for the greenback.
World financial coverage shifts additionally pose a problem for the US greenback. For instance, the Reserve Financial institution of Australia is predicted to keep up its present coverage stance till subsequent yr, which may add strain on the greenback.
In distinction, the Swiss franc is predicted to stay robust as a consequence of its safe-haven standing and the Swiss Nationwide Financial institution’s anticipated conclusion of its easing cycle in September.
UBS forecasts that the euro, British pound, and Australian greenback will all strengthen in opposition to the US greenback by June 2025, with at 1.16, at 1.38, and at 0.70.
The anticipated weakening of the US greenback has vital implications for international markets. Because the greenback depreciates, threat property comparable to high quality shares are prone to develop into extra enticing, notably in an setting the place the Federal Reserve is chopping charges.
UBS means that traders take into account reallocating money into high-quality bonds, particularly these from investment-grade corporations, to make the most of the altering financial panorama.
Regardless of some indicators of weak point within the US labor market, comparable to an uptick in unemployment in July, the general image stays resilient. Weekly jobless claims have declined, and shopper spending continues to point out energy, assuaging fears of an instantaneous recession.
UBS maintains its base case for a gentle touchdown for the US economic system, supported by the anticipated charge cuts from the Fed.
