Investing.com – The U.S. dollar has been in high demand lately, near its highest level of the year. However, it is unlikely that this increase will continue in the coming months, according to UBS.
At 08:05 ET (12:05 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was trading at 105.597, up about 1% in June and just below the 2024 high of 106.52 reached in April.
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That strength reflects a combination of factors, including the Federal Reserve keeping rates elevated longer while other major central banks, including the European Central Bank, the Swiss National Bank and the Bank of Canada, have already started cutting them, UBS analysts said in a June 27 note.
As the American currency is often considered a safe haven by investors, it has probably also benefited from the political uncertainty linked to the French legislative elections, the first round of which takes place this Sunday.
The US dollar has gained around 14% against the yen since the start of the year, surpassing the 160 level this week and pushing the Japanese currency to its weakest level since 1986.
The euro, which is the largest component of the DXY index, also fell more than 3% against the dollar in 2024.
Further upward pressure on the US dollar remains possible in the short term.
If former US President Donald Trump is seen as more likely to win the election after the first televised debate with President Joe Biden later today, it could send the US currency higher – given the potential for fiscal policy more flexible if the Republican Party wins both the White House and control of Congress.
The outcome of Sunday’s French elections could also weaken the euro if right-wing or left-wing parties do well.
However, the recent strength in the US dollar is expected to fade in the coming months, the bank adds, as a slowdown in US growth will allow the bank to start cutting rates in September.
The greenback, which we view as richly valued, is also likely to come under downward pressure as markets begin to price in a deeper Fed rate-cutting cycle.
Finally, fears about the size of the US budget deficit could constitute another unfavorable factor in the long term, added UBS.
