Dollar strength to continue, UBS says, forecasting EUR/USD end year below parity

Investing.com — The dollar bulls aren’t likely to cave in anytime soon as higher Federal Reserve interest rates related to other central banks and pro-growth policies including tax will likely ensure the greenback continues come on top against its G-10 peers including the euro, Canadian dollar, and the yen.

“[T]he most likely path is still USD strength as part of the natural consequence of the US following policies that work to generate excess demand, high interest rates and also a stronger currency, at the same time as other countries are cutting interest rates and downgrading inflation fears relative to growth ones,” UBS said in a recent note.

EUR: to end year below parity against USD: Three bearish factors weighing on euro

1. Interest rate convergence with other low-yielding currencies like the Japanese yen and Swiss franc is expected to increase the euro’s attraction as a funding currency.

2. The political outlook for the eurozone remains unhelpful, with potential risks stemming from German elections.

3.Concerns about U.S. tariffs pose a threat to the euro area economy.

UBS forecasts the EUR/USD to end 2025 at 0.990.

JPY: to take cues from BoJ amid hopes for rate hikes to turn the tide

The yen’s outlook is tied to expectations of Bank of Japan policy shifts. UBS expects the BOJ will deliver 75 basis point rate hikes, compared with current market positioning of 50bps, potentially supporting the yen.

But the path to BOJ rate hikes isn’t straightforward. The central bank hiked rates in December and may not be keen to hike again at a time when “US policy is still unknown and could be potentially dangerous for Japan,” UBS said, flagging the risk of U.S. tariffs.

UBS is forecasting USD/JPY at 150 by the end of 2025, down from current levels around 158.

CAD: Biggest CAD trading opportunities will be on the cross

The Canadian dollar is likely to face headwinds from US tariffs and political uncertainty ahead of the upcoming election, but loonie is still likely to outperform some peers, particularly sterling, UBS said.

Shorting or selling GBP/CAD position is attractive, with the bank suggesting a 1-year GBPCAD 1.73 put 1.60 risk knock-out option.

While CAD faces near-term risks from potential U.S. tariffs, it should ultimately benefit from its close relationship with the U.S. and more positive sentiment towards Canadian assets following this year’s Canadian elections, UBS added.

This post is originally published on INVESTING.