Investing.com -- A stronger U.S. dollar is likely to dominate global foreign exchange markets through the second half of 2026, according to UBS, which has raised its forecasts for the greenback against several major currencies as higher U.S. interest rate expectations and resilient economic fundamentals continue to underpin demand.

The bank now expects the euro to weaken further, lowering its end-2026 forecast for EUR/USD to 1.12 from 1.14 previously, while projecting the Japanese yen to slide to 165 per dollar by both the end of the third quarter and year-end. UBS argues that recent repricing in U.S. interest rates, combined with expectations for additional Federal Reserve tightening, should continue to support the dollar despite already elevated positioning.

UBS said the U.S. Dollar Index (DXY) has broken to new highs for 2026 and could test the 102 level last seen in May 2025. While long-dollar positioning has increased, the bank believes it remains well below extremes reached in 2024, leaving room for additional gains.

The firm maintained a constructive view on sterling, expecting the British pound to remain resilient amid a stable fiscal outlook and supportive capital flows. It forecasts EUR/GBP to strengthen toward 0.85 by year-end, citing the currency's attractive carry profile and limited impact from domestic political developments.

By contrast, UBS turned more cautious on the Australian dollar, cutting its end-2026 AUD/USD target to 0.68 from 0.74. The downgrade reflects softer Australian economic data, diminishing support from interest-rate differentials, and reduced expectations for hedging demand from domestic pension funds.

The bank also expects further near-term weakness in the Swiss franc as the Swiss National Bank's dovish stance encourages its use as a funding currency for carry trades, though it believes structural factors should help the franc recover some ground later in the year.