UBS: Volatile Year Ahead for EUR/USD as the Greenback Remains Overvalued

UBS Global Wealth Management has issued a detailed forecast for the EUR/USD exchange rate, projecting significant fluctuations in 2025 driven by shifts in dollar strength and market dynamics.

The report anticipates a turbulent year for the pair, marked by a sharp decline in the first half followed by a partial recovery in the latter half.

Key Projections for EUR/USD

UBS predicts that the euro will decline to parity with the dollar by March 2025, reflecting continued pressure on the European currency. The pair is expected to recover moderately to 1.02 by June and further to 1.06 by December, suggesting a gradual rebound as broader macroeconomic conditions evolve.

The narrative underpinning these projections highlights a year of two distinct halves for the euro-dollar exchange rate. The first half is expected to showcase sustained dollar strength, driven by global risk aversion and tighter monetary conditions. Conversely, the second half is anticipated to reflect a partial unwinding of these dynamics, allowing the euro to regain some ground.

Drivers of Dollar Strength in the First Half

UBS attributes the dollar's anticipated dominance in the first half of 2025 to several interrelated factors. Chief among these is the dollar's status as a safe-haven currency. With persistent global uncertainties, including geopolitical tensions and volatile financial markets, investors are likely to continue favoring the dollar for its perceived stability.

Furthermore, the Federal Reserve's monetary policy stance plays a crucial role. While the Federal Reserve is nearing the end of its tightening cycle, its relatively high interest rate environment compared to other central banks continues to support the dollar.

UBS emphasizes that even though the dollar is in "strongly overvalued territory," its attractiveness as a high-yielding currency may keep it buoyant in the near term.

Challenges for the Euro

The euro faces a set of distinct challenges that contribute to its projected weakness. Sluggish economic growth in the Eurozone, coupled with persistent inflationary pressures, limits the European Central Bank's ability to aggressively tighten monetary policy. These constraints may widen the interest rate differential between the euro and the dollar, further pressuring the single currency.

Additionally, the Eurozone's reliance on energy imports, particularly from non-European suppliers, exposes it to external shocks. Any fluctuations in energy prices or disruptions in supply chains could amplify the euro's vulnerability.

Rebound Potential in the Second Half

UBS's forecast for a partial recovery of the euro in the second half of 2025 hinges on several factors. As global economic conditions stabilize and risk sentiment improves, the demand for the dollar as a safe-haven asset may diminish. This shift could provide some breathing room for the euro to recover.

Moreover, the euro may benefit from a recalibration of market expectations regarding the Federal Reserve's monetary policy. Should the Fed signal an easing bias or pause its rate hikes, the resulting narrowing of yield differentials could lend support to the euro.

Lastly, structural adjustments within the Eurozone, including fiscal initiatives aimed at bolstering growth, could enhance investor confidence in the region's economic resilience. These efforts may act as a counterweight to the euro's earlier weaknesses.

Implications for Investors and Businesses

The projected volatility in the EUR/USD pair underscores the importance of strategic planning for investors and businesses with exposure to currency fluctuations. Companies involved in transatlantic trade should consider hedging strategies to mitigate the impact of potential exchange rate swings.

For investors, the divergence between the first and second halves of 2025 presents both risks and opportunities. Those seeking to capitalize on dollar strength may find value in the early part of the year, while the anticipated euro recovery later in the year could create opportunities for repositioning.

Conclusion

UBS's forecast for the EUR/USD pair outlines a complex interplay of factors shaping the exchange rate trajectory in 2025. While the dollar's strength dominates the outlook for the first half of the year, the potential for a euro recovery in the latter half offers a dynamic landscape for market participants. As always, navigating these shifts will require careful monitoring of economic indicators, central bank actions, and geopolitical developments.