UBS forecasts a significant decline in the US dollar in 2025 as global economic conditions change. Recent US economic data show positive trends, allowing the dollar to regain some ground. However, UBS warns that this outperformance will moderate next year, leading to a potential decline in the dollar.
After two years of exceptional US economic performance, the current restrictive monetary policy appears increasingly unjustified. With inflation returning to target levels and the labor market loosening, the Federal Reserve cut rates by 0.5 percentage points in September. Analysts at UBS expect the Fed to continue adjusting rates closer to neutral in the near future.
This anticipated drop in US interest rates will likely weaken the dollar, which has benefited from the highest interest rates among G10 nations. As US yields decline, investments outside the US become more appealing. Consequently, this shift may reduce the dollar's overvaluation. UBS anticipates that the greenback will weaken by mid-single digits over the next 12 months, reinforcing the trend of dollar decline in 2025.
Investors can find attractive alternatives in the Swiss franc (CHF), British pound (GBP), and Australian dollar (AUD). Notably, Switzerland’s relative yield differentials are improving, which supports the CHF. UBS predicts the USD/CHF will trade at 0.80 by the third quarter of 2025. In contrast, the UK and Australia are poised for sustained economic growth, which keeps their yields high compared to the US.
Moreover, in a favorable risk environment, UBS forecasts that the AUD/USD and GBP/USD will trade at 0.75 and 1.38, respectively, in the second half of 2025. Therefore, investors should consider diversifying into these currencies as the anticipated US dollar decline approaches.
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UBS forecasts a US dollar decline in 2025. Investors should consider CHF, AUD, and GBP for improved returns and diversification opportunities
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