UBS just cranked up its dollar forecasts, and the reason isn't complicated: the Fed's hitting the brakes on rate cuts while everyone else keeps slashing. The bank now sees EUR/USD at 1.18 and USD/JPY at 152 by the end of 2025. That's a notable shift upward from their earlier calls.
UBS lifts dollar targets to EUR/USD 1.18 and USD/JPY 152 as Fed rate cuts slow while other central banks accelerate easing.
Here's the setup. The Fed is expected to cut rates just twice in 2025, totaling 50 basis points, likely in Q2 and Q3. Meanwhile, the ECB is anticipated to slash 100bps in the first half alone. That divergence matters. A lot. Slower U.S. cuts have pushed yields higher, giving the dollar broad support even as rate cuts typically weaken currencies.
But UBS isn't just pointing to monetary policy. They're citing something less conventional: U.S. artificial intelligence exceptionalism. Yeah, AI. The bank argues that America's edge in AI innovation is driving strong equity markets, pulling in capital flows, and bolstering USD demand. AI-driven productivity gains are apparently showing up in robust economic data, creating what UBS views as a structural growth advantage over other regions. UBS also expects anticipated tax cuts to support dollar strength alongside diminished risk premia for FOMC re-composition.
The numbers back up the strength. Nonfarm payrolls and services PMI readings have beaten expectations. U.S. activity looks solid, and domestic uncertainty is lower than in Europe, South Korea, or the UK. All of this delays the dollar depreciation that normally follows Fed easing.
Market positioning reflects the optimism. CFTC futures show the highest net dollar length since 2015. Investors are betting big on the greenback. The BIS Triennial FX Survey has historically tracked such shifts in market structure and trading volumes across major currency pairs.
UBS even floated the possibility of USD/JPY pushing toward 155 if equities stay hot. The Bank of Japan isn't changing policy, which keeps pressure on the yen. EUR/USD could briefly touch parity before recovering to 1.06 by December 2025. AUD/USD was revised up to 0.68 by year-end. The Australian dollar adjustment follows headline annual inflation jumping to 3.5% from 3.0%, prompting UBS to push back expectations for RBA rate cuts.
Risks exist, of course. Softer U.S. labor data could knock the dollar down. Japanese authorities might start grumbling about intervention if USD/JPY climbs too high. Any global market shock could reverse things fast. But for now, UBS is betting the dollar stays strong, powered by policy divergence and America's AI-fueled edge.
