The slowing down of the US economy + high deficit pressures prompt UBS to sound the alarm on the devaluation of the US dollar.

UBS Wealth Management Chief Investment Office (CIO) released a report stating that due to the uncertainty around US tariffs and economic outlook, the US dollar index fell to a three-year low in June. With the slowdown in the US economy and increasing focus on the fiscal deficit, it is expected that the US dollar will further weaken over the next 12 months. The CIO stated that the US dollar index fell nearly 10% in 2025. Harsher than expected US tariffs have diminished investors' view of the US exceptionalism. The CIO believes that the traditional role of the US dollar as a "safe haven" asset is facing challenges. The CIO expects the US dollar to continue to decline as investors may "sell on rallies." Given the ongoing trend of global diversification away from non-dollar assets, and increasing concerns about the US fiscal outlook, any rebound in the US dollar in the short term is unlikely to be sustained. Previously, the US dollar was supported by expansionary fiscal policies and tight monetary policies. This situation may change as further US government spending expansion is unlikely, and the ongoing impact of the trade war may prompt the Fed to adopt a slightly looser stance in 2025. In the medium term, the unsustainable twin deficits of the US will also put pressure on the US dollar. The CIO recommends reducing, hedging, and diversifying US dollar exposure. The CIO believes the US dollar is unattractive and predicts that by June 2026, the euro will rise to 1.20 against the US dollar. The CIO leans towards taking advantage of the recent strength in the US dollar by investing in other currencies such as the yen, euro, pound, and Aussie dollar to reduce excess US dollar cash. The CIO believes it is time for investors to reassess the strategic currency allocation in their international investment portfolios and consider hedging back the US dollar exposure in US assets into their home currency.