(UBS)
Last week, the Swiss National Bank (SNB) kept rates at zero, refraining from further easing despite recent data showing that inflation slowed to zero in November on an annual basis. SNB Chair Martin Schlegel stressed again that the “hurdle is high” for further easing. That partly reflects the potentially adverse side effects of negative rates on pension returns, the health of the banking system, and the risks of a property bubble. But there are signs that the SNB is not alone in having reached the end of its rate-cutting cycle, which we expect a range of central bank meetings coming up this week to underline.
The Chief Investment Office (CIO) sees the European Central Bank keeping rates on hold at 2% this week, and for the foreseeable future, despite subdued inflation. Nor do they expect Norway’s Norges Bank to lower rates, given inflationary pressures and a tight labor market. In CIO's view, Sweden’s Riksbank has reached the end of its easing cycle. While the Bank of England is an exception, and CIO anticipates two more rate cuts this cycle, they see a broad global trend in which the US's rate advantage is being eroded.
Against this backdrop, the DXY index, which tracks the US currency against six major peers, fell to its lowest level since October and is down around 9% year to date. That puts the dollar on track for its worst year since 2017. Aside from its narrowing rate advantage, CIO expects the dollar to face headwinds from its elevated valuation, the twin fiscal and current account deficits, as well as a move by central banks to diversify away from the US currency.
CIO expects US dollar weakness to extend into the first half of 2026. Their current forecast is for the euro to strengthen to about 1.20 against the dollar in the first quarter, from around 1.16 at present. CIO are also positive on relatively high-yielding currencies, such as the Norwegian krone and Australian dollar.
Original report – Weekly Global: What to watch in the week ahead, 15 December 2025.
