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Time to take ‘some profits’ on ebullient euro — UBS Wealth

The euro has had a good run. Is it running out of luck? UBS Wealth Management thinks so, explaining it is time to cash in on gains given “limited upside” in the next six months.

The euro has surged 11.9 per cent on the dollar this year, as the currency bloc’s economy has looked brighter than expected, and forecasts for policy tightening at the Federal Reserve have dimmed substantially on the back of lacklustre US data.

But the risks are now growing that the buck could rebound, at least over the short-run, according to UBS Wealth’s chief investment officer Mark Haefele.

“With market participants having now largely unwound expectations for rate hikes over coming months, there is … some potential for dollar strength if the US Federal Reserve signals a greater willingness to proceed with policy normalisation,” Mr Haefele said.

There is also the “possibility of a short-term US dollar rebound if the US passes a tax reform package or raises the debt ceiling without incident.”

Overall, the wealth manager reckons the dollar’s overvaluation compared with the euro has fallen from about 20 per cent at the start of this year to 7 per cent at present.

UBS’s view contrasts with data released late last week that indicated speculators, such as hedge funds, have been boosting bets that the dollar will extend its sharp 2017 fall.

Mr Haefele added that it is also time to begin taking profits on the euro versus the Swiss franc, saying that, “the euro’s rise against the Swiss franc may continue over the long term, we think the near-term rally may have run its course.”

“Geopolitical tensions stemming from North Korea might further limit the upside for [the euro against the franc] in the near term,” he said.