Dollar Rating Lowered to “Unattractive”

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UBS’s Chief Investment Office recently released a report downgrading the U.S. dollar’s rating to “unattractive.” The bank expects the dollar to weaken further due to slowing U.S. economic growth and rising fiscal deficit pressures.

Dollar Faces Potential “Sell the Rally” Scenario

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On April 21, the U.S. dollar index hit its lowest level since 2025, driven by stricter-than-expected U.S. tariffs that challenged investor confidence in “American exceptionalism.”

However, the dollar later rebounded by 1% as signs of easing U.S.-China trade tensions and a preliminary U.S.-U.K. trade deal alleviated some concerns. Despite this recovery, the dollar’s broad index has still declined by 8.4% year-to-date.

UBS warns that investors may soon “sell the rally,” leading to further declines in the dollar.

Factors Weakening the Dollar

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Previously, the dollar was supported by a mix of expansive U.S. fiscal policy and restrictive Federal Reserve monetary policy. However, UBS believes this dynamic could shift.

Growing fiscal deficits may limit further government spending, while the economic impact of trade wars could push the Fed toward a more accommodative stance in 2025. Additionally, unsustainable U.S. “twin deficits” (fiscal and trade deficits) are expected to weigh on the dollar in the medium term, despite higher long-term Treasury yields.

Another concern is Fed Chair Jerome Powell’s term ending in January. With the next chair to be nominated by the incoming administration, the Fed’s independence could come under scrutiny again.

UBS Recommends Reducing Dollar Exposure

UBS advises non-U.S. dollar-based investors to reduce excess dollar holdings. The bank suggests using recent dollar strength as an opportunity to diversify into currencies like the yen, euro, pound, and Australian dollar.

International investors are also encouraged to reassess their currency allocations and consider shifting dollar assets back into their home currencies.

Gold as a Hedge

UBS maintains its earlier forecast that gold could reach $3,500 per ounce by Q1 2026. The bank views recent gold price dips as a strategic buying opportunity and recommends a 5% allocation to gold in investment portfolios.

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