UBS Forecasts Smaller Dollar Weakness in 2025 than Previously Expected
UBS analysts have revised their 2025 forecast for the U.S. dollar, now predicting less weakness than initially expected due to several key factors. Although the dollar has recently reached fresh year-to-date highs against its major rivals, including the euro, UBS believes the greenback’s strength will be more resilient than previously thought. This change in outlook follows the Federal Reserve's more hawkish tone in its December meeting, signaling fewer rate cuts in the near future. The dollar has been propelled by this stance, along with growing concerns over tariff risks and the global macroeconomic environment.One of the most affected currencies by this dollar strength has been the euro, which has struggled to maintain momentum against the greenback. UBS analysts forecast the EUR/USD exchange rate to trade around $1.05 in the first half of 2025. However, they caution that a potential drop to parity for the EUR/USD cannot be ruled out, primarily due to ongoing tariff threats and the continued macroeconomic divergence between the U.S. and Europe. Despite this short-term risk, UBS maintains a more positive long-term view on the euro.
Looking ahead, UBS expects any move towards parity to be brief. As the economic backdrop in Europe improves, especially in the latter half of the year, the analysts predict that the EUR/USD pair could rebound. They forecast that the euro will likely return to a range between 1.08 and 1.10 in the second half of 2025, driven by narrowing two-year yield differentials between the U.S. and Europe and better economic data emerging from the Eurozone. This forecast highlights a shifting dynamic where the U.S. dollar may face greater challenges, and the euro could regain its footing as European economic growth strengthens.
In conclusion, while the dollar remains strong, UBS's outlook suggests that it won't weaken as much as previously thought in 2025, and the euro's trajectory will depend largely on the evolving macroeconomic conditions in both the U.S. and Europe. This updated view offers a nuanced perspective for currency traders and investors who have been navigating the uncertainty surrounding the USD’s long-term outlook.
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