The U.S. dollar has come under pronounced pressure so far this year, yet analysts at UBS have urged caution about positioning for a further, sustained decline. Market moves have been driven in large part by a cluster of political headlines and investor reactions, the bank said.
At 09:20 ET (14:20 GMT) the Dollar Index, the gauge that measures the greenback against a basket of six currencies, was trading 0.4% higher at 96.500, though it has still shed around 1.5% year-to-date. The euro has outperformed the dollar this year, with the EUR/USD pair up roughly 1.4% year-to-date and briefly topping $1.20 earlier in the week.
UBS analysts trace renewed downward pressure on the dollar back to mid-January, when a series of political and policy-related headlines emerged. Those included U.S. demands concerning Greenland, the threat of extra tariffs, and talk of reaching some sort of a "deal." The bank highlighted several additional developments that have compounded market unease.
Specifically, UBS cited the risk of a U.S. government shutdown, the potential announcement of a new Federal Reserve chair - noting that Kevin Warsh was nominated for the role today by President Donald Trump - and a pending Supreme Court decision on the legality of tariffs as factors that have fed dollar weakness. Reports about potential intervention in the Japanese yen and speculation about a so-called "Plaza 2.0" agreement have also added momentum to existing moves.
According to UBS, these items have prompted international investors to price in a USD risk premium. The bank observed that the sharp rally in gold and precious metals more broadly reflects investor unease tied to recent political and geopolitical developments.
Despite these political pressures, UBS warned that macroeconomic fundamentals would otherwise support a stronger dollar. The bank pointed to a recent labor market report that was stronger than prior releases and to sharply higher growth expectations, factors that have led markets to reprice expectations for Federal Reserve rate cuts.
UBS acknowledged that several of the political factors noted could create additional near-term downside for the dollar, with market reference points for EUR/USD in the 1.23-1.25 range. Still, the bank cautioned against becoming overly bullish on EUR/USD.
UBS said many of the headline risks could be resolved or clarified, and that policymakers are likely to act to counter excessive dollar depreciation. The bank also expects U.S. economic data to remain sufficiently robust to bring an end to the Fed’s easing cycle in the first half of 2026. Taken together, UBS sees limited scope for EUR/USD to move materially higher than 1.20 over the coming months.
Having reached its 1.20 target for EUR/USD, UBS now views the balance of risks as more even, noting that while the euro could overshoot in the short term, the pair is likely to consolidate near 1.20 in the months ahead.
Implications for markets
- Foreign exchange markets have been the immediate conduit of these developments, with the dollar’s move influencing cross-currency pairs such as EUR/USD.
- Precious metals have reacted to heightened political and geopolitical uncertainty, with gold in particular rallying as investors price in risk premia.
- Investor positioning and risk sentiment are sensitive to headlines around tariffs, monetary policy appointments, and potential currency interventions.