Investing.com - The U.S. dollar has been weak for large periods this year, and UBS forecasts further selling into 2026 as weaker U.S. growth and policy uncertainties create structural headwinds for the greenback.
At 04:30 ET (08:30 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, fell 0.4% to 99.595, over 8% lower year-to-date. Additionally, EUR/USD rose 0.4% to $1.1328, over 9% higher so far in 2025.
The U.S. economy has outperformed its peers in terms of growth in recent years. One major reason has been its very expansionary fiscal policy, despite an already booming economy. This has kept Federal Reserve monetary policy in restrictive territory, while other central banks have been in easing mode.
However, this fiscal and monetary policy is set to change, according to analysts at UBS, in a note dated May 21.
The Trump administration has come into power with promises of dialing back unnecessary spending and using those savings for tax cuts.
“Textbook economics and U.S. political wrangling suggest to us that there will probably be short-term pain before long-term gain, as spending cuts will need to happen first, ahead of any positive impact from tax cuts,” said UBS.
“Additionally, we expect U.S. growth to slow over the next few quarters, as uncertainty could put the brakes on investment decisions. With this negative combination, the Fed looks set to resume its easing cycle later this year.”
At the same time, the European fiscal and monetary policy mix is also changing. Germany lifting the debt brake is a step change, as it marks the biggest fiscal expansion in the country since its reunification.
As a result, combined with increased European defense spending, we expect eurozone growth over our forecast horizon at 1% or more. As fiscal stimulus is likely to kick in toward the end of this year, the period of monetary policy easing in Europe is likely to finish with rates stabilizing at 1.75%, in our view.
“We think the convergence of growth and monetary policy leaves room for EURUSD to move higher,” UBS said. “We believe the USD should weaken in the upcoming quarters, and we introduce our end-June 2026 forecast for the EUR/USD at 1.20.”