UBS analysts predict that the U.S. dollar will maintain its strength through the end of the year, driven by higher interest rates from the Federal Reserve compared to other central banks and pro-growth policies, including tax reforms. The greenback is expected to continue outperforming its G-10 counterparts, including the euro, Canadian dollar, and yen.
In a recent note, UBS explained that the most likely scenario is one of ongoing dollar strength, which is seen as a natural consequence of U.S. policies that foster excess demand, high interest rates, and a stronger currency. This contrasts with other countries, which are cutting interest rates and focusing more on growth concerns than inflation.
Euro to End the Year Below Parity Against the Dollar: Three Bearish Factors
UBS forecasts the EUR/USD exchange rate will finish 2025 below parity, citing three key bearish factors weighing on the euro:
Interest Rate Convergence: As other low-yielding currencies, such as the Japanese yen and Swiss franc, align their interest rates with the euro, the euro’s appeal as a funding currency is expected to rise, which could pressure its value.
Political Uncertainty in the Eurozone: The political outlook remains a challenge for the eurozone, with risks associated with upcoming German elections that could further destabilize the region’s economy.
U.S. Tariff Concerns: Fears that U.S. tariffs could impact the euro area’s economic growth also pose a threat to the single currency.
Given these factors, UBS forecasts the EUR/USD to close 2025 at 0.990.
Yen Outlook Hinges on Bank of Japan’s Policy Shifts
The Japanese yen’s performance is largely dependent on expectations for the Bank of Japan (BOJ) to adjust its policy stance. UBS anticipates that the BOJ will implement 75 basis points of rate hikes, surpassing current market expectations of 50 basis points. This could lend some support to the yen, especially as global rates continue to rise.
However, UBS also notes that the path to BOJ rate hikes is not straightforward. Despite a rate hike in December, the BOJ may be reluctant to tighten further, given the uncertainties surrounding U.S. policy and the potential risks posed by U.S. tariffs on Japan. UBS has set a forecast of USD/JPY at 150 by the end of 2025, down from current levels around 158.
Canadian Dollar Faces Near-Term Headwinds, but Longer-Term Outlook Remains Positive
The Canadian dollar (CAD) is likely to face challenges, particularly from U.S. tariffs and political uncertainty ahead of the upcoming Canadian elections. However, UBS sees the loonie outperforming some of its peers, particularly the British pound.
UBS highlights opportunities in the CAD cross-rates, particularly suggesting shorting or selling GBP/CAD as a potentially lucrative trade. The bank recommends a 1-year GBP/CAD put option with a risk knock-out at 1.60.
Despite near-term risks from U.S. tariffs, UBS expects CAD to ultimately benefit from its strong economic ties with the U.S. and more positive sentiment toward Canadian assets following this year’s Canadian elections.
In summary, while the U.S. dollar is poised to maintain its strength in the coming months, UBS’s outlook for major currencies like the euro, yen, and Canadian dollar remains cautious, with significant risks emerging from both political and economic factors globally.
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