Dollar Cycle Analysis - Dollar cycles are significantly longer than economic, commodity, equity, and bond market cycles, averaging around 18 years [1] - The last dollar bear market occurred in 2002 [1] - There are emerging signs potentially indicating the beginning of a new dollar bear market [2] Factors Influencing Dollar Weakness - Twin deficits in the U S are contributing to the potential dollar bear market [3] - Recoveries in China, Europe, and other global regions are also factors [3] Asset Allocation Trends - Large asset owners, including institutional investors and sovereign wealth funds, are considering non-dollar exposure [3][4] - These investors are evaluating diversifying their asset allocations to other parts of the world [3][4]

Investment Rating - UBS maintains a bearish outlook on the dollar, forecasting significant further weakness by year-end, with EUR/USD expected to reach 1.23 and JPY/USD at 130 [2][17]. Core Insights - The report identifies both cyclical and structural reasons for the continued weakness of the dollar, including high US net foreign debt, over-ownership of the dollar in global reserves, and potential policy actions that could further devalue the dollar [4][21][33]. - A weaker dollar is generally seen as positive for global equities, easing financial conditions and leading to earnings upgrades [5][74]. Summary by Sections Why Should the Dollar Continue to Weaken? - The dollar is expected to remain in a bear market due to long-term cycles and structural issues, including US net foreign debt nearing 90% of GDP and significant unhedged dollar positions held by foreign investors [4][21][23][33]. Tactical Factors Pointing to a Weaker Dollar - UBS forecasts US GDP growth to slow from 1.7% YoY in Q2 to 0.9% YoY in Q4, with expectations of four rate cuts by year-end, which contrasts with market expectations of only two [3][42][46]. Investment Implications - A weaker dollar is projected to positively impact global equities, with a 10% decline in the dollar potentially adding approximately 2% to MSCI AC EPS growth [5][79]. - Emerging markets are expected to be the clear winners from a weaker dollar, with significant relative performance improvements [6][83][90]. Regional Insights - Emerging markets and the Eurozone are expected to outperform in unhedged terms when the dollar weakens, while the US is likely to underperform [6][84][90]. - In local currency terms, Japan and the UK are projected to be the worst performers, while emerging markets are anticipated to be the best [84][90]. Sector and Stock Recommendations - In Europe and the UK, sectors such as retailing and budget airlines are expected to benefit from a stronger Euro, while pharma is seen as an underperformer [12]. - In the US, sectors like software, telecoms, and household products are expected to perform well if the dollar weakens [14]. Emerging Market Opportunities - Specific companies in emerging markets, such as Cathay and CTBC, are rated as buys and are expected to benefit significantly from a weaker dollar [13][121].