Investing.com - The U.S. dollar is headed for its first weekly gain since mid-March, but UBS sees more losses ahead, citing U.S. policy uncertainty and doubts over the Federal Reserve’s independence.
At 06:15 ET (10:15 GMT), EUR/USD fell 0.3% to $1.1355, on course for a weekly loss of around 0.3%. However, the pair holds gains of over 5.5% this month, and almost 10% year-to-date.
“U.S. policy uncertainty, especially around the Fed and tariffs, has weakened the USD and increased investor risk aversion, supporting EUR/USD as investors seek alternatives,” said analysts at UBS, in a note dated April 24.
In our view, we have seen the peak in tariff risks, but U.S. policy uncertainty remains elevated, UBS noted. President Trump’s public criticism and legal inquiries into Fed Chair Jerome Powell’s removal have unsettled investors, leading to a decline in the U.S. dollar.
“While Powell’s early removal is unlikely—given his term runs until May 2026—the mere discussion around Fed independence has added a new layer of uncertainty. This, combined with ongoing trade tensions, has increased tail risks for investors and put further pressure on the USD, UBS said.
Institutional investors, especially in Europe, are responding by increasing FX hedges, and with more capital flowing outside the U.S., the potential for a U.S. dollar rebound in the short term appears limited.
Looking ahead, the base case is for a gradual de-escalation of tariffs as trade deals are reached, but persistent uncertainty is likely to weigh on U.S. corporate investments and economic growth.
As the Fed embarks on a new easing cycle while the ECB and other central banks pause or end theirs, the U.S. dollar should come further under pressure.
Outside the U.S., growth is also set to slow, but Europe may emerge as a relative outperformer: it is less exposed to US tariffs, the ECB is near its neutral rate, and fiscal easing is underway in Germany and the eurozone.
“This backdrop supports the euro and its regional peers, suggesting that EUR/USD is likely to remain supported,” UBS added.
As a result, we see EUR.USD moving to or below 1.10 as less likely, the Swiss bank said.
“After the recent strong rally, we continue to expect a phase of consolidation in a $1.12 to $1.16 range, rather than a quick move higher. Over the medium term, however, EURUSD is likely to gradually move higher towards our March 2026 target of $1.18,” UBS said.
The bank has lifted its EUR/USD forecasts to $1.14 in June, $1.16 in September, $1.16 in December, and $1.18 in March 2026, from previously $1.10, $1.12, $1.12 and $1.14 for the same forecast horizon.