UBS Recommends Buying US Dollar on Dips, Citing Fed and Oil Risks

Strategists at UBS are advising investors to view recent U.S. dollar weakness as a buying opportunity, citing persistent risks from potential Federal Reserve policy tightening and rising oil prices that could outweigh the impact of softer inflation data.

Near-Term Headwinds for the Dollar

The U.S. dollar has come under pressure following the release of weaker-than-expected June inflation data, according to a UBS strategy note published Tuesday. The firm stated that the soft Consumer Price Index (CPI) print has reduced the immediate urgency for the Federal Reserve to tighten monetary policy.

Combined with existing long positioning in the currency, UBS anticipates further consolidation for the dollar in the near term. Renewed geopolitical tensions in the Middle East have provided some support, but the inflation data has been the dominant driver recently.

The Case for Renewed Strength

Despite the immediate softness, UBS maintains a favorable long-term view on the dollar and recommends buying on dips. The firm's strategists outlined three primary factors supporting their outlook:

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• Federal Reserve Policy: While the probability of near-term rate hikes has diminished, the risk of future Fed tightening has not disappeared.
• Energy Prices: Ongoing tensions in the Middle East could lead to upside risk for oil prices, a development that is often supportive of the U.S. dollar.
• U.S. Asset Demand: A strong U.S. corporate earnings season could revive investor demand for American assets, increasing capital inflows and strengthening the currency.

Tactical Entry Points

In its note, UBS identified specific levels for investors to consider building long dollar positions. The firm's strategists view rallies in the EUR/USD currency pair toward 1.1550 as an attractive opportunity to initiate positions that would benefit from dollar strength.

Additionally, UBS noted that dips in the USD/CHF pair toward the 0.80 level present another favorable entry point for investors looking to add exposure to the U.S. dollar.