UBS House View Daily

Thought of the day

26.07 - Dollar descending

The dollar's decline has been swift and broad, depreciating over the last five sessions against all of its G10 peers. EURUSD briefly spiked above 1.17 on 25 July, while the trade-weighted dollar is down some 7% from its December 2016 peak. Net long USD positions have fallen to a three-year low, while net long euro bets are at a decade peak. This might suggest the bulk of the trade is done.

But we still see room for the dollar to decline further:

  • US inflation has been weak, falling below expectations for four straight months, adding to a dovish tilt in recent Fed commentary.
  • Hopes for US reforms and stimulus are fading, with the White House preoccupied by allegations of links to Russia and the Republican Party so far unable to agree on a healthcare reform plan. While the S&P 500 hit a record high on 25 July, currency traders have been more sensitive to political events.
  • Even after its recent decline, the dollar remains overvalued against the euro by some 7%, with our fair value estimate for EURUSD at 1.25.

We continue to prefer the euro over the dollar, and forecast EURUSD at 1.20 over 12 months. The dollar's descent could accelerate if the FOMC offers fresh dovish commentary on 26 July, or if President Trump's political challenges intensify. In contrast, we may reconsider our position if EURUSD moves past 1.20, or if the Fed adopts a more hawkish stance.

Chart of the day

Dollar descending

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