The US dollar suffered a massive sell-off in the first half of the year, and UBS expects continued weakness with US macroeconomic data set to be the main driver.
In the first half of 2025, the US dollar fell by 11%, with both high- and low-risk currencies recording gains against the dollar.
The pace and scale of foreign currency appreciation against the dollar was driven by factors specific to each currency, UBS analysts said in a note dated July 1.
“European currencies benefited significantly from Germany’s fiscal changes, while China’s yuan’s lackluster performance and global growth concerns limited the strength of Asian currencies. Weakness in major Latin American currencies in the second half of 2024 opens the door to a stronger recovery for the Brazilian real (BRL) and the Mexican peso (MXN) in the first half of the year,” UBS said.
With fiscal challenges in the US remaining high and economic growth expected to slow, the overall weakness of the US dollar is expected to continue for the remainder of the year.
“However, given that US growth expectations have already been downgraded and the dollar now reflects much lower bond yields than elsewhere, the next decline may not be as dramatic as before. Macro data from the US is expected to be a key determinant of the US dollar’s direction by guiding the Federal Reserve’s (Fed) policy,” UBS added.
UBS expects strong macro data from the US in the second half of the year to shape the US dollar’s trajectory.
“We expect US growth to decline slightly below 1% quarter-on-quarter in Q3 and also year-on-year in Q4. While this may sound alarming, the consensus expectation among economists is actually at that level,” UBS said.
With growth expectations already low, it is unlikely that the upcoming data will force economists to revise their forecasts to a more negative level, unlike what happened earlier this year.
