Further pressure on the US dollar is likely: UBS By Investing.com

Investing.com — The US dollar is expected to face increasing downward pressure in the coming months, despite a recent boost from stronger-than-expected economic data.

According to analysts at UBS, the outlook for the greenback remains bearish, driven by a combination of narrow interest rate differentials, concerns over the growing US fiscal deficit and shifting global monetary policies.

In light of these factors, UBS downgraded the US dollar to “Least Preferred” in its global strategy, instead favoring currencies such as the euro, sterling and Australian dollar.

On Thursday, the US dollar gained some ground after the release of revised second quarter GDP growth numbers.

“Meanwhile, second-quarter GDP was revised upwards to an annual growth rate of 3.0% from the previously reported 2.8%, driven mainly by higher consumer spending,” analysts said .

This revision was largely driven by stronger consumer spending, which also saw an upward adjustment to an annualized rate of 2.9% from 2.3% initially.

These positive data have helped the US dollar recover slightly, but it remains under pressure. It has fallen 3% in the past month and continues to approach the lower end of its early 2023 range.

Despite this temporary reprieve, UBS analysts say the broader outlook for the dollar is negative, with several factors likely to push it lower in the coming months.

One of the key factors expected to influence the US dollar is the anticipated narrowing of interest rate differentials.

The US Federal Reserve is likely to continue cutting interest rates, with UBS projecting a total cut of 100 basis points over the Fed’s three remaining meetings in 2024.

While other central banks, including the Swiss National Bank, the Bank of England and the European Central Bank, are also expected to cut rates, their approach is likely to be more measured.

This slower pace of discounting abroad could make the dollar less attractive compared to other currencies.

In addition to the interest rate outlook, concerns about the US fiscal deficit are expected to further erode confidence in the dollar. The Congressional Budget Office has projected that interest costs on the US debt will exceed defense spending this year, highlighting the growing fiscal challenges facing the country.

As the US presidential race intensifies, with Vice President Kamala Harris currently leading in the polls, the fiscal deficit is likely to become a focal point of debate, potentially creating headwinds for the dollar.

Changes in global monetary policy also pose a challenge for the US dollar. For example, the Reserve Bank of Australia is expected to maintain its current policy stance until next year, which could add pressure on the dollar.

Instead, the Swiss franc is expected to remain strong thanks to its safe-haven status and the Swiss National Bank’s anticipated end to its easing cycle in September.

UBS expects the euro, pound sterling and Australian dollar to all strengthen against the US dollar by June 2025 to 1.16, 1.38 and 0.70.

The anticipated weakening of the US dollar has significant implications for global markets. As the dollar depreciates, risk assets such as quality stocks are likely to become more attractive, especially in an environment where the Federal Reserve is cutting interest rates.

UBS suggests that investors consider reallocating cash into high-quality bonds, especially those from investment-grade companies, to take advantage of the changing economic landscape.

Despite some signs of weakness in the US labor market, such as a rise in unemployment in July, the overall picture remains resilient. Weekly jobless claims fell and consumer spending continues to be strong, easing fears of an imminent recession.

UBS maintains its base case for a soft landing for the US economy, supported by expected Fed rate cuts.