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UBS: Investors should manage their dollar exposure

2024-10-18

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The UBS report predicts that falling U.S. interest rates and concerns about fiscal deficits will weaken the dollar in the medium term. In the medium term, the dollar should continue to weaken.

The report also expects the Swiss National Bank to cut interest rates twice more in this cycle, and the Federal Reserve still has a lot of room to cut interest rates.

The report believes that investors should therefore reduce their dollar exposure by partially hedging U.S. dollar assets, increasing international exposure, converting U.S. dollar cash and fixed income exposure to other G10 currencies, or using options. The report also believes that gold can effectively diversify investments.

In the medium term, the dollar should continue to weaken

From the peak at the end of June to the end of September, the U.S. dollar index fell more than 5.35% before rebounding sharply in early October.

As the interest rate advantage of the U.S. dollar over other currencies will further narrow in the coming year, UBS expects the U.S. dollar to continue to depreciate.

UBS believes that once the U.S. election is over, renewed attention to the U.S. fiscal deficit may put pressure on the U.S. dollar.

Investors should manage their dollar exposure

Many global investors hold large unhedged U.S. stock and bond positions and should consider the potential impact of a depreciating U.S. dollar on their portfolios.

UBS recommends taking advantage of the dollar's strength by hedging US positions through currency futures, swaps, options or structured transactions, or switching to hedged equity classes.

UBS said they favor the euro, pound, Australian dollar and Swiss franc and expect gold prices to move higher.

UBS expects the SNB to cut rates two more times this cycle, while the Fed has plenty of room to cut rates.

Uncertainty about the US election, still-high speculative short positions in the Swiss franc, and (in our view) over-expectations of SNB rate cuts should all support the Swiss franc.

Gold prices should rise further against the backdrop of falling interest rates, economic and geopolitical uncertainty, and a diversification of foreign exchange reserves away from the US dollar.

In an international context, borrowing Swiss francs generally looks attractive as Switzerland's nominal interest rates are lower than other G10 currencies. But as we believe the Swiss franc will appreciate further, especially against the US dollar, international borrowers with outstanding Swiss franc loans should be prepared to manage Swiss franc loans more actively.

Geopolitical tensions are likely to extend beyond the fourth quarter as the policies of the next US administration remain unclear and conflicts in Ukraine and the Middle East continue. A weaker dollar and lower US interest rates would generally support gold prices.

We expect the euro to benefit from a strong recovery in the eurozone trade balance, while the Reserve Bank of Australia may not cut interest rates until next year.

UBS said investors should reduce their holdings of the US dollar as it is likely to weaken further in the medium term. "We like the Swiss franc, euro, pound and Australian dollar. We also recommend an allocation to gold in a balanced US dollar portfolio of no more than 5%," UBS said.

The above information is provided by special analysts and is for reference only. CM Trade does not guarantee the accuracy, timeliness and completeness of the information content, so you should not place too much reliance on the information provided. CM Trade is not a company that provides financial advice, and only provides services of the nature of execution of orders. Readers are advised to seek relevant investment advice on their own. Please see our full disclaimer.

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UBS: Investors should manage their dollar exposure

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