Summary
UBS reiterated to clients that accumulating U.S. dollars during pullbacks remains the preferred tactic so long as energy prices do not retreat and the AI-led investment theme continues to underpin markets. The bank's note, authored by strategist Shahab Jalinoos, described a muted week across G10 currency markets and flagged structural pressures that keep the euro on the defensive.
Market backdrop and euro outlook
Jalinoos said the France-Germany 10-year yield spread has settled around 140 basis points. He described that level as uncomfortable from France's perspective and said it reinforces a strategy of selling euro rallies rather than buying the currency on strength. UBS's baseline sees the euro testing a fourth-quarter range low of 1.1050 against the dollar, while the bank maintained its end-2026 EUR/USD target of 1.1200.
While the strategist pointed to tentative signs that diesel prices may be stabilizing - a factor that could offer some support to the euro - he warned that Europe remains exposed. Specifically, natural gas inventories are exceptionally low and gas futures are trading near new cycle highs, creating a vulnerability that offsets any limited respite from diesel.
Dollar drivers and near-term influences
UBS noted that recent softness among technology stocks may create conditions for some dollar consolidation. In addition, softer-than-expected inflation prints could dampen expectations for further monetary tightening out the curve, a development that would also weigh on the dollar's momentum. Despite these potential offsets, the bank maintained its core message: as long as energy prices remain elevated and the AI-driven investment narrative remains intact, buying USD on dips will remain appropriate.
Commodity currencies and tactical views
On the commodity-linked currencies, UBS described the Australian, New Zealand and Canadian dollars as being in consolidation mode. The strategist argued that limited pricing in for additional rate hikes leaves those currencies positioned to recover losses recorded in September. Among those three, the Canadian dollar was identified as UBS's preferred tactical long.
Comments on the yen and balance of payments
Jalinoos also disputed the notion that Japanese selling of French debt would be a primary driver of yen strength. He cited balance of payments data as showing that exposure has already fallen considerably, suggesting that any such channel is less potent than sometimes assumed.
This note leaves UBS's core foreign exchange view unchanged while highlighting several market-specific factors that could produce short-term dispersion: energy price trajectories, the health of the AI investment theme, European gas supply metrics, and incoming equity and inflation data. These elements collectively shape the bank's recommendation to favour dollar accumulation on dips.