The U.S. dollar has kicked off 2025 with impressive gains, hovering near multi-decade highs. However, UBS strategists anticipate a shift in the second half of the year, as they believe the greenback is now significantly overvalued.
“Although the dollar has continued to strengthen in early 2025, we expect the year to unfold in two distinct phases—sustained strength in the first half, followed by a partial or full reversal in the latter half,” UBS analysts stated in their latest market outlook.
The U.S. Dollar Index has climbed roughly 9% since late September, recently surpassing the 110 mark, a level UBS describes as “frothy.” The strategists highlighted that the dollar is trading in “overvalued territory” with heightened investor positioning, as futures data reveals the highest net long positions on the dollar since 2015.
This surge has been fueled by stronger-than-expected U.S. economic indicators, including robust nonfarm payrolls and a solid services sector PMI. These factors have dampened expectations for significant Federal Reserve interest rate cuts this year.
While market sentiment currently anticipates just one Fed rate cut in 2025, UBS continues to project two reductions, totaling 50 basis points, likely occurring in the second and third quarters. “We foresee the Fed easing rates twice this year, but not before the second quarter,” the strategists noted.
In the near term, UBS expects the dollar’s strength to persist, underpinned by resilient U.S. economic performance. However, with President-elect Donald Trump’s inauguration just days away, the introduction of new tariffs could temporarily bolster the dollar further. “Tariff risks remain underappreciated by the market,” the analysts cautioned.
