UBS warned on Monday that the dollar is now in overextended territory after the latest Trump-driven surge.
“We caution that the U.S. dollar appears stretched at current levels,” UBS analysts said in a recent note.
The dollar index rose about 0.5% to above 106 on Monday after U.S. President-elect Trump threatened to impose 100% import tariffs on BRICS countries unless they abandon the development of a joint currency or use alternatives to the dollar for international trade.
"The idea that the BRICS countries will try to move away from the Dollar while we sit back and watch is over," Trump wrote on social media early Sunday.
Despite the increasing efforts for de-dollarization, the dominance of the dollar as the king of global currencies is likely to continue.
Analysts say the dollar dominates financial markets and international trade, with more than 47% of global payments conducted in dollars. In all transactions, the dollar still accounts for 88% of the share, making it the most prominent global currency from a liquidity perspective.
Analysts wrote in a report: "Despite the tensions surrounding the dollar's dominance in the global financial system, we do not see any compelling factors that could threaten the dollar's dominance."
While the outlook for the dollar still seems bright, in the short term, UBS analysts suggest that investors take advantage of the dollar's strength to reduce their dollar exposure.
Since Trump's victory last month, the dollar has performed strongly, as investors have been betting that Trump's tariff plans will lead to inflation, thereby weakening the Federal Reserve's ability to cut rates.
"There is no doubt that Trump's tweets have once again proven to be a key short-term driver of the currency market," said Jonas Goltermann, deputy chief market economist at Capital Economics.
In addition, investors will prepare for several key U.S. economic events this week, including Fed Chair Powell's speech on Wednesday and the closely watched non-farm payroll data on Friday.
Andrew Brenner, head of international fixed income at NatAlliance Securities, said: "This data will tell us whether the Federal Reserve will cut rates by 25 basis points this month or pause the cuts."
Data from the CME shows that investors expect a 75% chance that the Federal Reserve will cut rates by 25 basis points at its meeting on December 17-18. In recent weeks, a series of strong economic reports have led investors to reduce the likelihood of a rate cut in December and decreased bets on the scale of further easing next year.
Win Thin, global currency strategist at Brown Brothers Harriman, stated that the U.S. economy is stronger compared to other regions, which will continue to support rising U.S. Treasury yields and the dollar.
Guy Miller, chief market strategist at Zurich Insurance Group, agrees with this view, stating that the dollar's upward momentum "will continue."
Due to the shaky French government, the euro has become one of the worst-performing currencies in the G10, with other major currencies such as the pound and the Canadian dollar also declining.
The euro fell nearly 0.8% against the dollar on Monday, marking the largest single-day decline in about a month, due to the worsening political crisis in France, where Prime Minister Michel Barnier faces a vote of no confidence over his tax and spending plans. The spread between French and German government bond yields has risen to a 12-year high.
The implied volatility of three-month euro options (a measure of traders' hedging demand) rose to a high of 8.172% on Tuesday, the highest level since Credit Suisse's crisis nearly two years ago.
Chris Weston, a strategist at Pepperstone, noted that there is also a high degree of uncertainty about the possible rate cut by the European Central Bank during its meeting later this month, which has heightened the volatility of the euro.
"Given the uncertainty surrounding the next steps of the European Central Bank (and the Federal Reserve) and the political risk premium in France, it certainly makes sense to bet on rising euro volatility," he said.
Article reposted from: Jinshi Data
