Yen’s Ascent: UBS Predicts Further Strengthening Against the Dollar
In a significant revision of its currency forecasts, UBS, the Swiss multinational investment bank, has lowered its projections for the USD/JPY exchange rate, anticipating a stronger yen in the coming years. The bank now expects the USD/JPY to reach 145 by the end of both 2025 and 2026, a downward revision from its previous estimates of 157 and 161, respectively. This adjustment reflects growing confidence in the Bank of Japan’s (BOJ) capacity to implement further interest rate hikes, a move that typically strengthens a nation’s currency. UBS economists are even forecasting a 25 basis-point rate hike by the BOJ during its December 19 policy meeting. This shift in monetary policy expectations is a key driver behind the yen’s recent outperformance against the dollar and reinforces UBS’s bearish outlook on the USD/JPY pair.
The revised USD/JPY forecast aligns with UBS’s broader foreign exchange trading views. The bank maintains a short position on the USD/JPY, anticipating further declines to 151 by the close of 2025 and ultimately to 145 by the end of 2026. This projection suggests a sustained strengthening of the yen against the dollar, driven by the BOJ’s anticipated monetary tightening. While the yen’s recent gains have been notable, UBS believes there is further room for appreciation, especially if the BOJ continues on its projected path of rate hikes. This outlook contrasts with previous market sentiment, which had largely anticipated a more gradual pace of yen appreciation.
Beyond the USD/JPY, UBS observes a period of relative stability in the broader G10 foreign exchange market, with the US dollar trading near its mid-November highs. This calm has persisted despite recent tariff-related pronouncements by US President-elect Donald Trump on social media. While markets initially interpreted these statements as negotiation tactics, UBS cautions that this perception may be short-lived. The potential for escalating trade tensions remains a risk factor for currency markets, and the initial muted reaction may not reflect the longer-term implications of protectionist policies.
Adding to the complexity of the global economic landscape, political uncertainty in Europe, particularly a recent no-confidence vote against the French government, could exert downward pressure on the euro. UBS analysts suggest that the potential impact of such political instability is greater now than it was during similar events in June, given the current backdrop of weaker economic growth and the European Central Bank’s (ECB) dovish monetary policy stance. This assessment supports UBS’s end-2025 EUR/USD target of 1.04, indicating a weaker euro against the dollar.
The confluence of these factors paints a picture of evolving dynamics in the global currency market. The yen’s projected strength against the dollar, driven by anticipated BOJ rate hikes, contrasts with the potential vulnerability of the euro amidst political uncertainty and a dovish ECB. Meanwhile, the US dollar, despite recent stability, faces potential headwinds from escalating trade tensions. These interconnected forces underscore the complex and often unpredictable nature of foreign exchange markets.
Navigating these complexities requires careful analysis and strategic positioning. UBS’s revised forecasts, underpinned by its assessment of monetary policy, political risks, and broader market trends, provide valuable insights for investors seeking to understand and capitalize on the evolving currency landscape. While the future trajectory of currency markets remains uncertain, understanding the underlying drivers and potential risks is essential for informed decision-making. The interplay between central bank policies, geopolitical developments, and market sentiment will continue to shape the dynamics of the foreign exchange market in the coming years.
