UBS now anticipates that a firmer U.S. dollar will be the dominant theme in global foreign exchange markets through the second half of 2026, upgrading its outlook for the greenback against a number of major currencies. The bank attributes this view to recent repricing of U.S. interest rates and continued expectations for further Federal Reserve tightening, alongside what it describes as resilient U.S. economic fundamentals that support dollar demand.
On specific pairs, UBS has lowered its end-2026 forecast for EUR/USD to 1.12 from a prior 1.14, signaling an expectation of more euro weakness against the dollar. For the yen, the bank projects USD/JPY to reach 165 by the end of both the third quarter and the year. UBS also highlighted that the U.S. Dollar Index (DXY) has moved to new highs for 2026 and could test the 102 level that was last recorded in May 2025.
UBS noted that long-dollar positioning has increased but remains below the extremes observed in 2024, leaving scope for additional upward movement in the dollar. The bank views the combination of rate repricing and prospects for additional Fed tightening as continuing to underpin the greenback, even given already elevated positioning among investors.
Looking across other currencies, UBS retained a constructive stance on sterling. It expects the British pound to hold up relatively well amid a stable fiscal backdrop and supportive capital flows, forecasting EUR/GBP to firm toward 0.85 by year-end. The bank cited the pound's attractive carry profile and judged that domestic political developments would have limited negative impact.
By contrast, UBS reduced its end-2026 target for AUD/USD to 0.68, down from 0.74. That downgrade reflects a mix of softer Australian economic data, less supportive interest-rate differentials and lower expected hedging demand from domestic pension funds.
The firm also anticipates near-term weakness in the Swiss franc. UBS said the Swiss National Bank's dovish posture encourages use of the franc as a funding currency for carry trades, although it still expects structural factors to allow the franc to regain some ground later in the year.
Implications and context
UBS's revised currency views suggest further strength for the U.S. dollar versus major peers through late 2026, with divergent fortunes across developed-market currencies. The bank's call reflects interplay between interest-rate expectations, positioning, and country-specific developments such as Australian data and the Swiss National Bank's stance. Reduced hedging demand from pension funds is one of the factors cited in cutting the Australian dollar target, while capital flows and carry dynamics inform the bank's constructive view on sterling.
Summary
- UBS raised its bullish stance on the U.S. dollar, citing higher U.S. rate expectations and resilient fundamentals.
- EUR/USD end-2026 forecast moved down to 1.12; USD/JPY projected at 165 by Q3-end and year-end.
- Sterling seen as resilient with EUR/GBP forecast toward 0.85; AUD/USD target lowered to 0.68 due to softer data and lower hedging demand.
Key points
- Stronger dollar outlook driven by U.S. rate repricing and expectations of further Fed tightening - impacts global FX markets and currency-sensitive sectors.
- EUR and JPY expected to weaken versus the dollar; sterling and Swiss franc have differentiated outlooks based on fiscal outlook, capital flows, and central bank stance.
- Changes in hedging demand from pension funds and use of the franc as a funding currency for carry trades may materially affect demand for specific currencies.
Risks and uncertainties
- Investor positioning: Although long-dollar positions have increased, UBS notes they remain below 2024 extremes - shifts in positioning could alter momentum.
- Central-bank policy moves: Further or different-than-expected actions by the Federal Reserve or other central banks could change currency trajectories.
- Domestic economic data: Softer-than-anticipated data in economies such as Australia is cited as a driver of currency downgrades; further weak or strong releases could influence outlooks.