US economic slowdown + deficit pressure, UBS sounds alarm on dollar depreciation
The UBS Wealth Management Chief Investment Office released a report stating that due to the slowdown of the U.S. economy and the increase in fiscal deficits, the U.S. dollar is expected to weaken further in the next 12 months. The dollar index fell to a three-year low in June, and it is expected that by June 2026, the euro will rise to 1.20 against the dollar. The CIO recommends reducing and hedging dollar risk exposure and considering investments in other currencies to mitigate excess dollar cash
According to the report released by the Chief Investment Office (CIO) of UBS Wealth Management, the US dollar index fell to a three-year low in June due to uncertainties surrounding US tariffs and the economic outlook. With the slowdown of the US economy and increasing concerns about the fiscal deficit, the dollar is expected to weaken further in the next 12 months.
The CIO stated that the dollar index has dropped nearly 10% by 2025. More severe than expected US tariffs have weakened investors' views on the exceptionalism of the US. The CIO believes that the traditional role of the dollar as a "safe-haven" asset is facing challenges.
The CIO expects the dollar to continue to decline as investors may "sell on rallies." Given the ongoing trend of global diversification away from dollar assets and increasing concerns about the US fiscal outlook, any rebound in the dollar in the short term is unlikely to be sustained.
Previously, the dollar was supported by both expansionary fiscal policy and tight monetary policy. This situation may change, as US government spending is unlikely to expand further, and the ongoing impact of the trade war may prompt the Federal Reserve to adopt a slightly accommodative stance in 2025. In the medium term, the unsustainable twin deficits in the US will also put pressure on the dollar.
The CIO recommends reducing, hedging, and diversifying exposure to dollar risk. The CIO believes the dollar lacks attractiveness and predicts that by June 2026, the euro will rise to 1.20 against the dollar. The CIO prefers to take advantage of the recent strengthening of the dollar by investing in other currencies such as the yen, euro, pound, and Australian dollar to reduce excess dollar cash. The CIO believes it is time for investors to reassess the strategic currency allocation in their international portfolios and consider hedging their dollar exposure in US assets back to their local currencies
