Some of the post-election gains in the US dollar have already been partially reversed, and UBS expects the currency to consolidate at current levels rather than push higher in the near term.
As of 06:15 ET (11:15 GMT), the Dollar Index, which measures the greenback against six major currencies, was up 0.4% at 106.612, recovering after hitting a one-week low earlier in the session. This comes after the index reached its highest point in a year last week, following Donald Trump’s victory in the presidential election.
Many market participants view Trump’s return as signaling not only a repeat of the dollar-supportive policies of 2018-2019 but also a broader paradigm shift, according to analysts at the Swiss bank in a note dated Nov. 20. Specifically, the expectation that import tariffs could play a more prominent role in trade and fiscal policy aligns with potential USD gains, both by reducing imports and prompting US trading partners to devalue their currencies.
UBS stated, “We see merit in these views and have previously argued that a second Trump administration points to a stronger USD in 2025 and 2026.” However, the bank also expressed tactical concerns.
For one, sustained breakouts in the dollar’s trading range depend on a steady stream of positive catalysts, which may be limited in the near term. The recent disputes over the Treasury Secretary nomination, for instance, highlight the potential for delays in decisive action ahead of Trump’s inauguration.
Secondly, while breakeven rates have significantly contributed to driving up US nominal yields, real rate differentials are providing less support for the dollar compared to nominal rates.
Thirdly, the market appears to have exhausted its capacity to price out potential Fed rate cuts over the next 12-15 months. Any signs of weakness in US economic data could prompt a reversal in market sentiment.
“As a result, we anticipate the dollar consolidating rather than moving higher in the near term,” UBS stated. “We expect EUR/USD to finish the year at 1.07.
