Further Dollar Weakness Expected, Despite Gains – UBS

The US dollar has experienced increased demand this week, marking a pause in its recent downward trend. However, UBS warns against taking long positions on the dollar moving forward.

As of 08:05 ET (12:05 GMT), the Dollar Index, which measures the greenback against a selection of six other currencies, was down 0.1% at 101.642, just shy of the previous session’s six-week high. This index has risen nearly 1.5% for the week, reflecting its strongest performance since April.

According to analysts at UBS, the dollar’s slight recovery this week can be attributed to several factors: geopolitical uncertainties have fueled a flight to safety, some US labor market data leading up to the crucial nonfarm payrolls and unemployment report have shown slight improvements, and lower-than-expected inflation figures in Europe have led markets to predict a 25 basis point cut by the European Central Bank in October.

The analysts noted, “If this trend of lower inflation persists in the US, the September inflation reading could approach 2%.” While UBS does not consider this its main scenario, it acknowledges that it cannot be dismissed.

With the mixed labor market data creating a complex picture, UBS suggests that a notable decline in inflation could pave the way for another 50 basis point rate cut from the Federal Reserve in November.

“Overall, we foresee a continuing weakness of the dollar in the upcoming months and recommend using the current strength of the USD to lessen exposure,” the Swiss bank stated. “Based on this perspective, we anticipate that the DXY could ultimately drop below 100.”