Dollar Weakness Deepens as Fiscal Risks Loom
The US dollar (USD) has faced renewed selling pressure this week as investors grow increasingly wary of long-term US fiscal sustainability. Despite rising Treasury yields, the greenback has struggled to gain traction, suggesting deeper structural concerns.
UBS analysts highlight an unusual divergence—typically, higher yields strengthen the dollar, but market skepticism over US debt levels is overriding this dynamic.
Why Is the Dollar Falling?
Fiscal policy uncertainty: Growing US deficits and political gridlock raise long-term stability concerns.
Risk premium on USD: Investors demand higher compensation for holding dollar assets amid debt fears.
Yield disconnect: Even with elevated bond yields, the dollar fails to rally, signaling bearish sentiment.
UBS believes this trend could persist, with Treasury yields more likely to fall than the dollar staging a strong rebound.
GBP/USD Surge: Pound Strengthens to 3-Year Highs
The British pound (GBP) has capitalized on dollar weakness, with GBP/USD climbing above 1.35—its highest level in three years. UBS sees further upside potential, targeting 1.38 and recommending buying dips toward 1.3390.
Key Drivers for Pound Strength
✅ Risk-on sentiment: Global market optimism supports high-beta currencies like the pound.
✅ UK-US trade deal advantage: The UK remains the only country with a bilateral trade agreement with the US, boosting GBP appeal.
✅ Bank of England policy: While UBS expects quarterly rate cuts, the Pound still benefits from relative stability compared to USD.
