- The dollar's weakening trend that started in late September is likely to continue, according to UBS.
- The prospect of Federal Reserve halting interest-rate increases will likely weigh on the greenback, strategists said.
The dollar fell in six of the last seven months and has lost 12% since late September. Its miserable run will likely continue as the Federal Reserve looks set to halt its interest-rate increases and given the risk of a banking crisis, according to UBS.
"While a pause does not mean that the Fed is ready for a rate cut, we continue to believe that the greenback will weaken further against key counterparts over the next 6-12 months, and it remains to us a least preferred currency," a team of strategists led by UBS global wealth management CIO Mark Haefele said Friday in a research note seen by Insider.
The US Dollar Index – which tracks the greenback against a basket of six other currencies, including the euro and the Japanese yen – is on track for a third quarterly loss as investors prepare for the Fed to end its monetary-tightening campaign. The US central bank has raised rates by 500 basis points since March 2022 in a bid to tame inflation that hit 40-year high last year.
UBS's forecast for further US currency losses comes two days after the Fed raised rates for the 10th time in a row – but signaled it may pause its war on inflation when it next meets in June.
In its latest communique, the central bank scrapped its previous guidance that "some additional policy firming may be appropriate" to tame inflation – and its chair Jerome Powell called the change in language "meaningful" at a post-decision press conference.
When interest rates stop rising, currencies tend to fall because foreign investors looking for higher yields are able to find better returns elsewhere.
UBS warned that a slowdown in US economic growth is also likely to weigh on the buck.
The annualized rate of GDP growth declined to 1.1% in the first quarter of 2023, from 2.6% in the prior three months. The Swiss bank warned of further stagnation ahead as the economy feels the full effect of the Fed's rate hikes and ongoing turmoil in the regional banking sector fuels a credit crunch.
"With the lagged effect of 500 basis points of rate hikes continuing to feed through to the economy and tightening credit conditions resulting from stress in the banking system, we expect US GDP growth to slow from here," Haefele's team said.
"This should lead to a falling growth differential between the US and the rest of the developed world, presenting a headwind for the dollar."
Further rate hikes by the European Central Bank, the Reserve Bank of Australia, and others could also devalue the dollar by pushing up the value of other currencies it's weighted against, the strategists added.