UBS says the Dollar continues to fall: Your problem, once again? - Trade Treasury Payments

In August 1971, the US implemented the ‘Nixon Shock’ economic measures. Treasury Secretary John Connally delivered an infamous statement to his G10 counterparts: “The dollar is our currency, but it’s your problem.” The decision triggered a 20% collapse in the dollar’s value.

More than five decades later, Connally’s words echo with renewed relevance as the world witnesses another significant dollar decline at present. The US dollar has experienced significant depreciation over the past six months, marking what analysts at UBS describe as “perhaps the biggest surprise of 2025 so far.” This downward trajectory appears likely to continue, according to financial experts, despite prevailing market uncertainties.

What does the UBS market analysis say?

At the beginning of 2025, market sentiment favoured a strong dollar due to expectations around President Trump’s economic agenda, which prioritised tax cuts and deregulation to boost growth and maintain US market competitiveness, often referred to as US exceptionalism. This contributed to the dollar’s overvaluation. 

However, the White House’s focus quickly shifted to tariffs, leading investors to worry about declining growth prospects, rising debt levels, and inflation concerns. These issues negatively affected US government bonds and the dollar’s performance.

In the last six-month period, all G10 currencies have strengthened against the dollar. The Swiss franc has shown double-digit gains. 

In a similar way, precious metals have shown an increase in value. UBS analysts also recently revised their gold forecast upward, indicating sustained positive momentum in this sector.

Key factors driving the Dollar’s weakness

The persistent US trade deficit indicates an overvalued dollar. While tariffs aim to create a new balance by improving the US attractiveness as a business location and improving the import-export balance, the effectiveness of these measures remains uncertain. There is a considerable possibility that tariff costs will be passed on to US consumers and businesses, potentially nullifying any competitive advantage. A structural weakening of the dollar would therefore be a crucial prerequisite for improving US industrial competitiveness.

Increasing political pressure on the US Federal Reserve regarding interest rate reductions is another significant factor. From an economic perspective, the argument for September rate cuts appears justified. Despite elevated and temporarily rising inflation, the moderate weakening of the US economy likely holds greater relevance for medium-term monetary policy decisions.

Additionally, in contrast to the Eurozone and Switzerland, where limited or no capacity exists for further rate reductions, lower US rates could put additional downward pressure on the dollar. Market pricing already reflects much of this expectation, creating potential for negative short-term surprises should the Fed opt against a September rate cut. Nevertheless, UBS maintains a September rate reduction in their baseline scenario.

From an institutional perspective, markets increasingly express concern regarding potential compromises to central bank independence. The substantial debt burden weighs more heavily than usual on US government finances due to elevated interest rates.

Way forward for investors 

For investors, particularly those in Switzerland and the eurozone, UBS recommends at least partial hedging of larger dollar positions. However, investment decisions can proceed independently of currency exposure considerations. For instance, technology stocks remain attractive due to ongoing growth in the artificial intelligence sector, making US equity exposure advisable despite currency concerns.

This perspective aligns with the current market, as the US equity market has experienced a strong recovery since April, yet the dollar continues to face downward pressure. Following a moderate recovery in July, the US dollar has resumed its depreciation trend throughout August.

UBS says that while uncertainty persists, particularly due to unpredictable US economic policy, additional dollar weakening appears more probable than not. This trend could further worsen challenges for Swiss exporters. The Trump administration may implement additional measures to maintain its vision of enhanced US industrial competitiveness through dollar weakening. Amid this, investors should remain vigilant and consider appropriate hedging strategies for dollar-denominated assets.