UBS continues to recommend buying the US dollar on dips, maintaining its bullish currency outlook as elevated energy prices and sustained investment in artificial intelligence support demand for the greenback.
In a research note published Wednesday, the Swiss investment bank reaffirmed its preference for purchasing the dollar during temporary market pullbacks.
However, UBS emphasized that its strategy depends on two important conditions: energy prices remaining high and the AI-driven investment trend continuing to attract capital.
UBS Maintains Bullish US Dollar Outlook Despite Market Consolidation
UBS strategist Shahab Jalinoos described trading conditions across the Group of Ten (G10) currency markets as relatively subdued during the week.
Nevertheless, persistent economic and geopolitical uncertainties continue to influence major currency pairs, particularly the euro against the US dollar.
According to Jalinoos, the yield spread between French and German 10-year government bonds has stabilized near 140 basis points.
Although the spread has stopped widening, it remains elevated enough to reflect significant concerns surrounding France’s fiscal position.
Consequently, UBS continues to view EUR/USD rallies as potential selling opportunities rather than signs of a sustained bullish reversal.
The bank believes the euro could weaken further against the dollar as European financial conditions remain challenging.
EUR/USD Forecast: UBS Sees Potential Decline Toward 1.1050
UBS expects the EUR/USD exchange rate to test the lower boundary of its projected fourth-quarter trading range at 1.1050.
Despite anticipating further downside pressure, the bank has maintained its end-2026 EUR/USD forecast at 1.1200.
This suggests that UBS sees scope for near-term euro weakness while still allowing for some recovery toward the end of the year.
Meanwhile, recent developments in energy markets have provided mixed signals for the European currency.
Jalinoos pointed to preliminary indications that diesel prices may be approaching a period of stabilization.
Such a development could offer some relief to European economies, where elevated energy costs have contributed to inflation and economic uncertainty.
However, the region remains vulnerable to additional supply disruptions.
European natural gas inventories are exceptionally low, while gas futures have climbed to fresh highs for the current market cycle.
These conditions continue to expose the eurozone to energy-related risks, potentially limiting the euro’s recovery against the dollar.
High Energy Prices and AI Investment Continue to Support the Dollar
Two major factors underpin the UBS US dollar outlook: persistent strength in energy prices and continued capital investment in artificial intelligence.
Elevated energy costs can place additional pressure on economies that depend heavily on imported fuel, including several European countries.
At the same time, the AI investment boom continues to support demand for US technology assets and related financial investments.
However, UBS acknowledged that recent weakness in technology stocks could trigger a temporary period of dollar consolidation.
Furthermore, softer-than-expected US inflation figures could reduce expectations for future Federal Reserve interest rate increases, potentially weighing on the greenback.
Despite these possible headwinds, the bank has not changed its underlying trading strategy.
As long as energy prices remain elevated and AI-related investment momentum continues, UBS believes buying the US dollar during market declines remains an attractive approach.
UBS Sees Recovery Potential in Commodity Currencies
Beyond the euro and US dollar, UBS also assessed the outlook for major commodity-linked currencies.
The bank believes the Australian dollar (AUD), New Zealand dollar (NZD) and Canadian dollar (CAD) are currently experiencing a period of consolidation.
However, expectations for additional interest rate increases remain relatively limited in these markets.
According to UBS, this positioning could provide opportunities for all three currencies to recover losses recorded during September.
Among them, the Canadian dollar is UBS’s preferred tactical long position.
This preference suggests that the bank currently sees comparatively attractive near-term opportunities in the Canadian currency, even while maintaining its broader bullish stance on the US dollar.
Japanese Yen Outlook: French Bond Sales Unlikely to Drive Major Gains
UBS also questioned the argument that Japanese investors selling French government bonds could provide significant support for the yen.
Jalinoos noted that balance-of-payments data indicate Japanese exposure to French debt has already declined considerably.
As a result, the bank believes that further selling of French bonds by Japanese investors is unlikely to become a major independent driver of yen appreciation.
This assessment challenges the view that capital returning to Japan from European bond markets could significantly strengthen the Japanese currency.
US Dollar Outlook Remains Dependent on Energy Markets and AI Spending
Overall, UBS continues to favor a buy-the-dip strategy for the US dollar, despite the possibility of short-term consolidation.
The investment bank remains cautious about the euro, particularly given France’s fiscal challenges and Europe’s ongoing exposure to elevated energy prices.
Meanwhile, strong AI-related investment activity remains an important component of its constructive dollar outlook.
Although weaker US inflation or a prolonged technology-sector correction could temporarily reduce dollar demand, UBS has not identified sufficient evidence to abandon its existing strategy.
For forex traders, the bank’s assessment highlights several important market drivers: European energy costs, Federal Reserve policy expectations, AI investment flows and interest rate differentials.
Ultimately, UBS believes the US dollar can maintain its underlying strength as long as these supportive conditions remain in place.
