Dollar to weaken less than expected next year: UBS

Investing.com -- The dollar recently notched fresh year-to-date highs against its rivals and is likely to remain strong after the Federal Reserve leaned more hawkish at its recent December meeting, analysts from UBS said in a recent note.

"While we still expect the dollar to fall, we now see less weakness in 2025 given these factors and adjust our forecasts slightly," analysts from UBS said in a recent note.

The less bearish view on the USD comes in the wake of the greenback making fresh year-to-date highs in key exchange rates and the expectations for fewer U.S. rate cuts. 

"The USD has been driven lately by prospects of fewer Fed rate cuts and tariff risks," the analysts said.

The euro has been particularly affected by dollar strength, but is expected to trade around $1.05 against the greenback in the first half of 2025, the analysts forecast. 

But a significant drop toward parity for the EUR/USD can't be ruled out, "due to real tariff threats or further divergence in the macro backdrop between the US and Europe," the analysts added.

Still, any move toward parity should be short-lived, the analysts said, amid expectations for the economic backdrop in Europe to improve in the second half of the year, narrowing the divergence between Europe and U.S. yields. 

"The trajectory back into the middle of the trading range or higher, 1.08 to 1.10, comes with the view that two-year yield differentials will still narrow to some degree and better macro data out of Europe provide some underlying support for EURUSD in 2H25," the analysts said.