Morgan Stanley forecasts that the US dollar is set to decline to pandemic – era levels by the middle of next year, primarily due to anticipated interest rate cuts and a slowdown in economic growth.
Analyst Projections in Detail
In a report released on May 31, strategists at Morgan Stanley, including Matthew Hornbach, predicted that a commonly used indicator of the US dollar will decline by around 9% from its current level by the same period next year. The ongoing trade turmoil is expected to add further pressure, exacerbating the recent depreciation trend of the US dollar.
The strategists noted, “We believe that interest rates and the money market have embarked on a sustained trend – the US dollar will fall significantly and the yield curve will become much steeper – after two years of wide – ranging volatile trading.”
Growing Pessimism about the Dollar’s Future
As traders and analysts grapple with the disruptive trade policies of US President Donald Trump, Morgan Stanley’s report adds to the growing skepticism regarding the US dollar’s future. Last week, JPMorgan Chase (264, -0.37, -0.14%) strategist Meera Chandan advised investors to remain bearish on the dollar and instead consider betting on the yen, euro, and Australian dollar.
Data shows that since its peak in February, the US dollar index has dropped by nearly 10%, largely due to Trump’s trade policies, which have eroded market confidence in US assets and prompted a reevaluation of the global reliance on the dollar. However, data from the US Commodity Futures Trading Commission (CFTC) suggests that bearish sentiment has not yet reached historical extreme levels, indicating potential for further weakening of the dollar.
Winners from a Weakening Dollar
Morgan Stanley strategists identified the euro, yen, and Swiss franc as the biggest beneficiaries of a weakening US dollar. These three currencies are widely regarded as alternatives to the dollar as global safe – haven assets.
The strategists projected that as the US dollar declines, the euro’s exchange rate against the dollar will rise from around 1.13 currently to approximately 1.25 by next year. Driven by “high arbitrage” opportunities and relatively lower trade – tension risks in the UK, the pound’s exchange rate against the dollar is expected to increase from 1.35 to 1.45. Analysts also anticipate that the current exchange rate of around 143 yen per US dollar could climb to 130 yen.
Outlook for US Treasury Yields
The bank also stated that the yield on 10 – year US Treasury bonds will reach 4% by the end of this year but will experience a significant drop after the Federal Reserve cuts interest rates by 175 basis points next year.
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