Dollar to consolidate in the near-term but downtrend remains intact – UBS
|The US dollar has been declining steadily, with the dollar index (DXY) falling by 9% since the year’s high in March. Economists at UBS now see reasons for the dollar to consolidate – the surge in US COVID-19 cases appears to be slowing and they expect Congress to reach an agreement on further fiscal stimulus, and short positions have built up. But longer-term, the economists expect further dollar weakness given ultra-loose US monetary policy, concerns over US indebtedness and the unwinding of long-term dollar holdings.
Key quotes
“We see three reasons why the USD depreciation trend could pause and the greenback may recover some lost ground in the near-term. 1. The increase in new COVID-19 cases in the US now appears to be slowing. Meanwhile, in parts of Europe new case growth is rising. 2. Concerns about the looming ‘fiscal cliff’ in the US as additional unemployment benefits have expired have also weighed on the dollar. While Congress has yet to reach an agreement, with both parties incentivized to reach a deal ahead of the presidential election, we expect a new package of at least USD 1 trilliom will be agreed. This should provide some relief for the US dollar. 3. Based on CFTC data, net short positions in the dollar against the euro held by speculative accounts have increased to their highest levels since 2018, raising the potential for a bout of profit-taking, if the news flow turns more positive toward the dollar.”
“Longer-term, we think the USD downtrend remains intact, even though we expect the pace of its decline to slow: The ultra-loose fiscal and monetary policy in the US, which has eroded the dollar’s interest rate advantage, is set to persist. Uncertainty related to the US elections is likely to continue to weigh on the dollar. Even after the election, uncertainty about the US fiscal stance and the extent of US indebtedness might continue to weigh on the USD. Prior to the COVID-19 crisis, many long-term investors had exceptionally high levels of USD exposure. We expect this over-exposure to be addressed.”
“On EUR/USD we expect the dollar to weaken to 1.22 (middle of a 1.20-1.25 range) by September 2021, and we would add exposure to the euro versus the USD on a dip to 1.15-1.16. For USD/CHF we forecast a rate of 0.90 over the same time horizon. While the Swiss National Bank has recently scaled back its currency intervention efforts, we expect it to continue to intervene to limit CHF strength.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.