Investing.com -- The dollar has started the year on the front foot, flirting with multi-decade highs, but strategists from UBS are backing a reversal in the second half of the year as the greenback is now in overvalued territory.
"While the USD has strengthened further in 2025, we still believe that 2025 will be a story of two halves—USD strength in 1H, and a partial or full reversal in 2H," UBS strategists stated in their latest market outlook.
The call for a softer dollar in the back half of the year comes as the US Dollar Index index has appreciated by approximately 9% since late September, recently trading above the 110 level and taking the greenback to frothy levels.
"The USD currently trading close to multi-decade highs in strongly overvalued territory and elevated investor positioning (with the CFTC futures showing the highest level of dollar net length since 2015) underpin this narrative," the strategists said.
The dollar's strength has been driven by better-than-expected U.S. economic data, including nonfarm payrolls and the services sector purchasing managers’ index, which have led to lower expectations for Federal Reserve rate cuts this year.
While markets continue to reprice Fed rate cuts, with consensus now for just one rate cut this year, UBS said it continues to expect two cuts. "We still expect the Fed to cut rates twice this year, for a total of 50bps of easing, but don’t expect these reductions until 2Q and 3Q," the strategists said.
For the near term, however, U.S. exceptionalism is likely to continue to support the dollar, they added, economic data to stay strong.
With just a under a week to go until President-elect Donald Trump's inauguration, UBS flagged the potential of new tariffs providing the dollar with a lift. "Tariff risks do not appear to be fully priced in," the strategists noted.