FUNDAMENTAL LONG-TERM FACTORS REMAIN A BURDEN ON THE DOLLAR – UBS

The US currency has bounced back in recent weeks, with the US Dollar Index (DXY) up 3.6% from its recent low in mid-July. However, economists at UBS do not expect the US Dollar’s rebound to last.

The US Dollar remains vulnerable

While the Dollar’s strength has been driven by robust US economic data, which have kept alive the possibility of further Fed tightening, we expect renewed weakness in the US currency.

Fundamental long-term factors remain a burden on the Dollar, including an expensive valuation, the twin fiscal and current account deficits, the rating outlook, and the high allocation of funds in the US.

We keep the US Dollar least preferred and the Euro most preferred. With inflation falling more quickly in the US than in Europe or the UK, we think it is more likely the peak is near for US rates than for European ones, and the Fed may consider easing sooner than other central banks. For the Euro, we think negative economic surprises in the region are already priced into the currency’s valuation, and the Eurozone’s improving trade balance should be supportive.