Title: UBS Maintains Bearish USD View Despite Recent Market Volatility
Original Author: eFXdata, Source: efxdata.com
UBS analysts have reiterated a bearish stance on the US dollar (USD) despite ongoing volatility in global markets, driven mainly by diverging global growth trajectories, adjustments in interest rate expectations, and mixed economic data from the United States. According to the strategy team at UBS, even though the USD has enjoyed some short-term support recently due to broader risk-off sentiment and shifting central bank narratives, the overall medium-term outlook remains negative. This article explores the key reasons behind UBS’s view, the forces influencing near-term USD performance, and the investment implications for foreign exchange (FX) market participants.
USD Performance Driven by External Developments and Sentiment Shifts
UBS acknowledges that the short-term dynamics of USD trading are being shaped largely by a mix of global and regional economic narratives:
– Risk-Off Sentiment: Rising geopolitical tension and persistent economic uncertainty in various parts of the world have contributed to a defensive investor stance. These conditions typically boost demand for safe-haven assets like the USD.
– Hawkish Repricing of Fed Expectations: Several stronger-than-expected US data prints, particularly around inflation and labor markets, have led markets to scale back their expectations for Federal Reserve rate cuts in the near term.
– Global Central Bank Divergence: While the Federal Reserve has adopted a relatively cautious stance on interest rate adjustments, other major central banks, such as the European Central Bank (ECB) and the Bank of England (BoE), have shown signs of being more dovish. This divergence has supported the USD on a relative value basis.
Despite these short-term factors favoring the greenback, UBS continues to hold a medium-term bearish view on the USD based on broader fundamental and cyclical factors.
Key Reasons for UBS’s Bearish Outlook on USD
UBS bases its negative outlook for the USD on several key themes which are expected to influence currency markets over the next twelve months:
1. Converging Global Growth Rates
– UBS anticipates that the current divergence in growth momentum between the US and other economies, especially in Europe and Asia, will start to narrow.
– Economic data in recent months indicate that non-US economies are stabilizing and may experience modest recoveries in coming quarters.
– As global growth rates begin to synchronize, the USD’s advantage based on its relative economic performance could erode.
2. Narrowing Interest Rate Differentials
– The strength of the USD in 2023 and early 2024 was fueled in part by higher interest rate differentials in favor of the US.
– As inflation pressure eases and central banks outside the US begin to normalize rates, the interest rate gap is expected to shrink.
– UBS believes that the Federal Reserve will gradually lower rates later in 2024, aligning closer with policy moves in Europe and other major economies.
3. Valuation and Positioning Concerns
– UBS argues that the USD remains expensive relative to historical valuations, particularly when measured against a trade-weighted basket of currencies.
– Dollar positioning among institutional investors has grown increasingly long, indicating a crowded trade that could be vulnerable to a reversal.
– A shift in investor sentiment or a catalyst that weakens the outlook for the USD could prompt an unwinding of these positions, accelerating a depreciation.
4. Persistent Twin Deficits in the US
– The US continues to run both a fiscal deficit (government budget shortfall) and a current account deficit (more imports than exports), which are traditionally negative for a currency over the long term.
– UBS expects these imbalances to persist or worsen, especially in an environment where fiscal spending remains high and the US economy continues to import more than it exports.
– These structural issues weigh on investor confidence and could lead to a gradual repricing of foreign capital inflows.
5. Improving Outlook for Other Currencies
– UBS points out that anticipated growth stabilization in Europe and Asia could provide support for currencies
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