Despite recent gains pushing the dollar to new year to date highs, UBS analysts suggest the greenback will likely stay stronger than previously anticipated due to the Federal Reserve’s increasingly hawkish stance at its December meeting.

“While we still foresee a decline in the dollar, we now predict less weakness in 2025 due to these factors and have adjusted our forecasts accordingly,” UBS analysts stated in a recent report.

The revised outlook comes as the dollar continues to perform well in key currency pairs, supported by expectations of fewer rate cuts from the Federal Reserve and lingering trade risks. “The dollar’s strength has recently been driven by reduced prospects for Fed rate cuts and ongoing tariff concerns,” the analysts noted.

The euro has been particularly impacted by the dollar’s rally, with UBS forecasting it to trade near $1.05 against the greenback during the first half of 2025. However, they cautioned that a drop toward parity between the euro and dollar remains a possibility, particularly if trade tariffs escalate or economic conditions in the U.S. and Europe diverge further.

Any dip toward parity is expected to be short-lived, as UBS analysts anticipate an economic rebound in Europe in the latter half of 2025. This recovery could help narrow the gap between European and U.S. yields, providing support for the euro.

“We expect the EUR/USD to move back into the mid-range of $1.08 to $1.10 as two-year yield differentials tighten and improved macroeconomic data from Europe lend support in the second half of 2025,” the report concluded.