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They expect interest rate cuts and fiscal deficit fears to weaken the dollar.
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Geopolitical tensions could extend well beyond this fourth quarter.
UBS, a leading global financial services firm, is recommending investors reduce their exposure to the dollar, opting for diversification with other currencies of the G10 countries, as well as exploring alternatives such as gold.
In this way, through a publication on its official site, dated September 30, the financial giant invites investors to consider the possible impact of a depreciation of the dollar in their wallets. This, taking into account that many global investors have large positions in unhedged US stocks and bonds.
Portfolio diversification is one of the measures that UBS considers most appropriate, given the possibility that the US currency continues to lose value.
This situation has been observed mainly since the beginning of July, a period in which the DXY dollar index, which measures the evolution of the US currency against six other major currencies, has experienced a drop of approximately 5%.
Hence, the recommendation is to take advantage of periods of dollar strength to hedge positions in the US currency through futures, swaps, options or currency structures, as well as by switching to hedged share classes. “We like the euro, the pound sterling and the Australian dollar,” says UBS.
The DXY dollar index has fallen 5% in recent months. Source: TradingView.
“The situation will not improve after the elections”
In its analysis, the UBS team predicts that the dollar’s interest rate advantage over other currencies will reduce further over the next year.
At this point, they note that stock investors have been encouraged by the Federal Reserve’s (Fed) commitment to supporting economic growth, along with President Jerome Powell’s assurances that the risk of a recession in the United States remains low.
However, unlike what the Fed president has said, analysts do not show confidence in Bitcoin-reacciona-alta-volatilidad/”>reducing interest rates which was applied two weeks ago. On the contrary, they hope that lower rates and fears of fiscal deficit weaken the dollar in the medium term.
“We also believe that a renewed focus on the US fiscal deficit could weigh on the currency once the elections are over in that country,” explain the UBS analysts, referring to the elections that will be held next November and whose victory will be disputed, almost on equal opportunities, Donald Trump and Kamala Harris.
That is why it is expected cause gold prices to rise further. All this, in a scenario with lower interest rates, economic and geopolitical uncertainty, and a process of diversification of the reserve assets of central banks, away from the US dollar.
While other major central banks are set to cut rates further (including the European Central Bank, the Swiss National Bank and the Bank of England), our view is that the Fed will cut rates at a faster pace than its peers. This will continue to undermine the US dollar’s yield advantage, a key support for the currency over the past two years.
UBS.
Overall, the firm concludes that the start of Fed easing will create headwinds for the US dollar and increase the incentive for non-dollar-based investors to reduce currency exposure. “This will have broader implications across all asset classes, adding to a favorable environment for stocks, the gold and oil.
It should be added that, although the signature does not refer to bitcoin (BTC)their statements also look favorable for the digital currency, especially taking into account the positioning you have achieved throughout this year as an investment asset and refuge of value.
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