Investing.com – The US dollar (USD) has entered 2025 in impressive fashion, with the (DXY) reaching 110, the highest level since late 2022. , is expected to continue through the first half of the year.
UBS points to several factors driving the USD's strength. Strong non-farm payrolls and purchasing managers' data have supported US economic sentiment, while higher yields continue to support the greenback.
In contrast, macroeconomic conditions in other major economies remain mixed. Growth in Europe remains subdued, while China, despite a projected expansion of 5% year over year in the fourth quarter of 2024, faces challenges in countering the trend of USD among US transmission risks.
“With the risks of US tariffs looming and significant, stronger activity in China unlikely to move investor sentiment and stop the USD rally, in our view,” UBS strategists said on directed by Dominic Schnider in a note.
“In our view, near-term USD strength is likely to continue in 1H25 with room for upside (DXY possibly reaching 115),” they said. Strategists also pointed out that a speculative long position in the dollar is dependent on consistently strong US data to maintain appreciation.
The difference in macroeconomic performance and monetary policy is also a key driver of the strength of the greenback.
While the US Federal Reserve is expected to maintain its current policy rate, other central banks, particularly in the Eurozone, are likely to cut rates further. This divergence adds to the potential for an outperformance of the USD, with UBS expecting the euro to trade below parity with the dollar in the coming months. .
In addition, transmission risks remain a major factor. Proposals for universal tariffs as high as 10% and targeted tariffs of up to 60% on Chinese imports could add to the attractiveness of the dollar. “A large part of the USD's strength can be attributed to better macro data – so transmission risks still have room to strengthen the USD in the short term,” strategists explained.
In this light, UBS expects the pair to fall below parity in early 2025, while it is expected to slide below 1.20. The bank also changed its forecast to 0.93 for March 2025, up from a previous estimate of 0.89.
Looking ahead, UBS remains cautious about projecting USD strength throughout the year.
“We still think 2025 could be a story of two halves – strength in 1H, and a partial or full reversal in 2H,” the strategists said. “The fact that the USD is trading at multi-decade highs in an overvalued area and that investor conditions have improved underpinning this statement, in our view.”
