UBS warns: The decline of the US dollar is not over. Investors should reduce, hedge, and diversify dollar risks
UBS warns that the decline of the dollar is not over, advising investors to reduce, hedge, and diversify dollar risks. Although the dollar index has fallen more than 10% by 2025, a sustained rebound is not expected. The slowdown in the U.S. economy may lead to interest rate cuts by the Federal Reserve, and UBS expects the Fed to cut rates by 100 basis points within the next 12 months, which could further depress the dollar. Investors are advised to increase allocations to alternative currencies such as the euro, Norwegian krone, and Australian dollar to mitigate dollar risk
According to the Zhitong Finance APP, UBS recently released a research report stating that although the US dollar index has fallen more than 10% so far in 2025, it is expected that the dollar will not experience a sustained rebound. The slowdown in the US economic growth may lead the Federal Reserve to resume an accommodative monetary policy, while the rate-cutting cycles of most other central banks are nearing their end. Therefore, the bank tends to diversify excess dollar exposure before the dollar may further decline.
UBS pointed out that as of August 29, the dollar index has dropped 10.6% year-to-date. This marks the largest half-year decline since the second half of 1991 and the worst start in over 50 years. Despite the significant drop, the dollar may still face pressure. Global central banks are gradually reducing their reliance on the dollar, which is a structural trend, and the growing demand for alternative currencies may weaken the dollar in the long term.
UBS stated that Federal Reserve Governor Waller suggested last week that if labor market data worsens, a 50 basis point rate cut may occur in September. The third-ranking official at the Federal Reserve, New York Fed President Williams, stated, "In my view, every meeting is an opportunity for real-time decision-making." Both have added weight to the dovish tone within the Federal Reserve, confirming the bank's view that the Fed is about to enter a cycle of consecutive rate cuts.
UBS expects that over the next 12 months starting in September, the Federal Reserve will cumulatively cut rates by 100 basis points, which may lead to further weakening of the dollar compared to other central banks that have already stopped cutting rates. Weakening US economic and employment data may trigger concerns about a more severe slowdown, thereby driving market expectations for faster and deeper rate cuts, as well as a quicker depreciation of the dollar. Additionally, uncertainties in trade policy and high fiscal deficits may continue to weigh on the dollar, as has been the case so far this year.
UBS advises investors to reduce, hedge, and diversify dollar exposure. The bank recommends that investors increase allocations to alternative currencies (especially the euro, Norwegian krone, and Australian dollar) to help diversify their portfolios and reduce dollar risk. Investors holding dollars beyond their long-term target proportion may consider hedging strategies, but should be aware of the associated risks. The bank also believes that now is an important time to review strategic currency allocations and consider how to establish currency exposure that aligns with long-term goals, assets, liabilities, and future income
