UBS believes certain emerging market currencies could present attractive opportunities despite the recent strength of the U.S. dollar, according to a note from the investment bank.
The firm observed that gains in emerging market currencies have stalled since early July amid dollar strength. However, UBS remains optimistic, citing expectations for Federal Reserve rate cuts and the appealing yields available in many emerging markets.
The bank singled out the Brazilian real, Mexican peso, Indian rupee, South African rand, and Egyptian pound as currencies that may offer value for investors seeking diversified exposure. It also suggested that selling USD upside against pairs like USD/ZAR and USD/ILS could provide potential yield enhancement.
UBS acknowledged that geopolitical risks remain high and likely to persist, with political instability increasingly influencing macroeconomic conditions. The bank also noted that the impact of tariffs on the dollar will depend on forthcoming decisions by both the U.S. administration and the Federal Reserve.
According to UBS’s base case, the ongoing trade war is expected to weigh on the U.S. economy over the next few quarters, prompting the Fed to cut rates. This scenario would likely weaken the dollar and bolster carry trades. At the same time, UBS cautioned that sharp dollar declines or unexpected policy moves could negatively affect pro-cyclical currencies.
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