Banking giant UBS warns: Do not make this mistake with the dollar

Global bond and currency markets are entering a more complex period, as rising government bond yields are not necessarily leading to currency strengthening as was common in the past. In UBS's daily strategy report, the bank analyzes recent developments and provides investors with several key recommendations.

UBS notes that government bond yields continue to climb, partly against the backdrop of rising oil prices following renewed American attacks in Iran. The yield on the 10-year US Treasury note reached about 4.78%, while the 30-year yield stands at about 5.27%. These are levels not seen since the beginning of the global financial crisis in 2008. Simultaneously, in Japan, the 10-year government bond yield crossed the 3% threshold for the first time since 1996.

Despite the sharp rise in yields, the US dollar has not recorded significant strengthening. The Japanese yen also struggled to strengthen during this period, until a sharp jump recorded following market expectations for an interest rate hike in Japan in September and fears of government intervention.

UBS explains this phenomenon by noting that investors today examine not only the level of yield, but also the reason behind it. According to the bank, "not all high yields are created equal." In other words, markets prioritize currencies of countries with a stable fiscal situation, consistent economic policy, and attractive yield, and less so currencies where the rise in yields stems from concerns regarding debt and economic stability.

Federal Reserve policy is also at the center of the analysis. Following hawkish remarks by Fed Governor Kevin Warsh, markets are pricing in a higher probability of an interest rate hike in the US. Despite this, UBS's base scenario is that the Fed will keep the rate unchanged until the end of the year, as employment and production data do not justify further tightening at this stage. On the other hand, the bank warns that oil prices and supply chain problems could lead to more stubborn inflation.

In terms of investments, UBS recommends that investors avoid overly concentrated exposure to the dollar and diversify their foreign currency holdings. Among the currencies preferred by the bank's economists are the Norwegian krone, which benefits from high yields and Norway's position as an energy exporter, as well as the New Zealand dollar. In addition, the bank expresses a positive stance regarding the British pound and the Chinese yuan.

Regarding the euro-dollar pair, UBS estimates that future weakening of the American currency could push the pair toward 1.18 to 1.20. Such a scenario could materialize especially if markets lower interest rate expectations in the US and, at the same time, the European Central Bank returns to raising rates.

In the conservative investment sector, UBS recommends examining short- to medium-term government bonds and continuing to hold gold as part of a diversification strategy. The bank views gold as a means of protection against currency erosion and against pressures related to the US budget situation.

The global energy market is also addressed in the report. Energy companies Chevron and Eni announced significant investments in Venezuela's energy sector following a new agreement between the US and Venezuela. Chevron plans to invest more than $7 billion over five years, while Eni is expected to invest about $1.5 billion per year.

However, UBS estimates that investments in Venezuela will not significantly increase oil production in the immediate term, as it will take years before the investments translate into a significant increase in production. Therefore, in the short term, oil prices are expected to continue to be influenced mainly by the tension between the US and Iran and the situation in the Strait of Hormuz.