The world's largest wealth manager is, for the time being, no longer positioning for a weaker euro-dollar exchange rate.

UBS Wealth Management is no longer taking a bearish stance on the euro in terms of its likely value compared with the dollar because forces at work pushing down the single European currency against the US currency have faded, at least for the moment, the firm says.

In a note on its tactical asset allocation position, the Swiss firm said that it initially took its underweight euro/dollar position in early 2014 when there was strong economic US growth and the prospects of higher US interest rates, while the European Central Bank was dramatically loosening monetary policy. These drivers, UBS said, “are now being tested”.

“First, economic growth in the first quarter of the year has disappointed in the US. Economic surprises are close to a three year low, and we recently downgraded our forecast for 2015 US GDP growth to 2.3 per cent from 2.8 per cent. The knock-on effect has been to push market expectations of a first interest rate hike to later in the year. The consensus at the start of the year was for an interest rate increase in June,” Mark Haefele, global chief investment officer, said.

“Second, a wide range of eurozone economic indicators have improved this year. Retail sales, lending, and business sentiment are all recovering, with the manufacturing purchasing managers index now higher in the eurozone than in the US for the first time since early 2014. The recent sharp upward move in bond yields suggests that this economic strength may now be starting to make itself evident in fixed income and currency markets, rather than purely in equity markets,” he continued.

He added that the recent increase in government bond yields across the world has brought a large portion of euro-denominated yields back into positive territory and that this development will reduce potential outflows from euro-denominated fixed income in the months ahead.

Even so, UBS’s “base case” is that the euro will depreciate further against the dollar and its three- and six-month forecasts for the exchange rate are 1.05 and 1.08 respectively.

“It is likely that economic momentum in the US will improve in the months ahead, and that the Fed will go ahead with a September rate hike. Any increased uncertainty around Greece could also lead to a downward move in the euro. We continue to assign a 50-60 per cent probability of a default, and a 20-30 per cent probability of an outright exit from the euro area,” Haefele said.