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The U.S. dollar has edged higher in recent days, but UBS anticipates continued depreciation through 2025. As of 06:40 ET, the U.S. Dollar Index rose 0.3% to 98.960, rebounding from a three-year low. The euro dipped 0.2% to $1.1397, though it's still up over 5.5% this month, while the yen weakened, pushing USD/JPY to 141.89, though down 5.8% for April.
UBS analysts attribute the dollar’s ongoing slide to factors resembling capital flight, including increased FX volatility, skewed risk reversals favoring dollar puts, and steepening of the U.S. Treasury curve. This week saw 10- and 30-year Treasury yields climb even as 2-year yields dropped, with tighter swap spreads reinforcing the perception of longer-term U.S. debt as riskier.
UBS maintains a bearish outlook on the dollar, citing capital outflows outweighing any positive effects from trade tariffs. The bank now expects EUR/USD to reach 1.23 and USD/JPY to fall to 130 by the end of 2025. It believes markets are recalibrating, seeking a risk premium that justifies holding U.S. assets amid rate differentials.
Additionally, UBS forecasts a significant narrowing of the interest rate gap between the Federal Reserve and European Central Bank over the next two years. This shift, it says, will be priced in by late 2025, supporting a peak in EUR/USD.
