UBS has lowered its long-term targets for the US dollar, looking forward to the currency’s recovery fading as early as September.
At 08:45 ET (12:45 GMT), the dollar index, which measures the greenback against a basket of six other currencies, was trading down 0.1% at 101.655, after rising to a two-week high of 101.79 at the start of the week.
EUR/USD The euro rose 0.1% to 1.1048, after the pair fell earlier in the week to a two-week low.
Analysts at the Swiss bank said in a note dated Sept. 4 that the sharp drop on Wall Street on Tuesday did little to allay market fears of negative September seasonal patterns over the past decade.
With the release of US employment data for August due on Friday, it brought back memories of the painful reaction in the markets to the weak July employment data at the beginning of August and the subsequent collapse that saw the VIX rise towards 70.
This movement also coincided with a classic explosion in mobile and beta forex trading, with USD/JPY and USD/CHF outperforming while the Australian dollar underperformed, despite offering fewer instruments at this time.
“What’s different now is that although the implied FX volatility index fell to 15 by the end of August, implied FX volatility remained relatively high in classic interest pairs and signs of accumulation of new positions were limited,” UBS added.
“We believe this means that any FX explosion will be more limited this time even if weak US data again leads to weak equities and lower US interest rates.”
As such, while the USD may also see a near-term recovery due to its own positive seasonal patterns after the sharp sell-off in July and August, ‘we expect this to be corrective in nature rather than continuing in the G-10 space, and is likely to be the result of higher-than-expected US data rather than the ‘risk’ of not released.
As a result, the Swiss bank is taking the opportunity to downgrade its forecast for the US dollar until the end of 2024 and 2025, and recommends taking advantage of the high correction we expect this month to expect further structural weakness of the US dollar later.
“Specifically, we now see EURUSD at 1.12 by the end of the year and at 1.15 by the end of 2025, with the decline in ‘American exceptionalism’ the main driver of the review, rather than any renewed enthusiasm for the euro,” UBS said.
“In fact, we are still pessimistic about the euro in most other crossing pairs. We see that political risks in both the US and Europe are unlikely to be key factors until there is a lot of transparency, leaving the floor to traditional macroeconomics.”
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