The U.S. dollar has moved sharply lower this year, pressured by a growing list of negative developments. However, analysts at UBS are warning investors to be careful about positioning for additional dollar weakness.
At 09:20 ET (14:20 GMT), the Dollar Index, which measures the greenback against a basket of six major currencies, was trading 0.4% higher at 96.500. Despite the rebound, the index is still down roughly 1.5% year to date.
The euro has also strengthened against the dollar. The EUR/USD pair is up around 1.4% so far this year and briefly climbed above the 1.20 level earlier this week.
According to UBS, the dollar has been under renewed pressure since mid-January. Analysts point to a series of political and trade-related factors, including U.S. demands over Greenland, renewed tariff threats, and speculation around a potential broader trade deal.
Additional pressure has come from rising political uncertainty. UBS highlighted the risk of a U.S. government shutdown, the potential appointment of a new Federal Reserve chair, and a Supreme Court ruling on the legality of tariffs as factors weighing on the dollar. The nomination of Kevin Warsh by Donald Trump for the Fed leadership role was cited as part of this uncertainty.
Market speculation around possible Japanese yen intervention and talk of a so-called “Plaza 2.0” agreement have also reinforced the existing downtrend in the dollar.
UBS believes these developments have led global investors to price in a higher U.S. dollar risk premium. The strong rally in gold and other precious metals reflects growing investor unease around political and geopolitical risks.
Despite these pressures, UBS notes that macroeconomic fundamentals would normally support a stronger dollar. Recent U.S. labor market data has exceeded expectations, while growth forecasts have improved. This has triggered a reassessment of interest rate cut expectations from the Federal Reserve.
In the near term, political risks could still drive further dollar weakness, with markets watching EUR/USD levels around 1.23 to 1.25. Even so, UBS cautions against becoming overly bullish on the euro.
The bank expects more clarity on several risk factors, while policymakers may resist excessive dollar weakness. In addition, resilient U.S. economic data could be strong enough to bring the Fed’s easing cycle to an end in the first half of 2026.
Taken together, UBS argues these factors limit the upside for EUR/USD. With the pair already reaching the 1.20 level, risks now appear more balanced. While a short-term overshoot is possible, UBS expects EUR/USD to consolidate around 1.20 in the months ahead.
