The U.S. dollar index has fallen about 7.5 percent from its multi-decade high in late September. But economists at UBS said the dollar should benefit from renewed risk aversion and a shift in market sentiment on Fed policy. The U.S. rate hike cycle is likely to end in 2023, and the dollar should weaken as the cycle draws to a close. However, while the greenback did not benefit from the risk-off sentiment at the start of the week, further strength is likely in the coming months.
The decline in U.S. inflation may not be as smooth as investors seem to think, and a setback in inflation could revive concerns about the extent of monetary policy tightening. In addition, downside risks to the global economy may also lead to new safe-haven flows into the dollar. EUR/USD is expected to fall back to 0.96 from the current 1.04 by next March.
