USD Index: A further burst of strength is likely in the coming months – UBS

The US Dollar Index has now dropped around 7.5% from a multi-decade peak in late September. But the US Dollar should benefit from renewed bouts of risk aversion, along with shifting market views on Fed policy, accoding to economists at UBS.

EUR/USD to drop back to 0.96 by March-2023

“During 2023, the US rate hike cycle is likely to end, and the US Dollar should weaken when the cycle draws to a close. However, while the Dollar did not benefit from the risk-off mood at the start of this week, a further burst of strength is likely in the coming months.”

“The decline in US inflation may be less smooth than investors appear to be assuming, and setbacks on inflation could revive concerns over the extent of monetary tightening.”

“Downside risks for the global economy could also cause renewed safe-haven flows into the Dollar.”

“We expect the Euro to fall back to 0.96 versus the US Dollar by March, down from 1.04 at present.”