The US dollar will tumble to levels last seen during the Covid-19 pandemic by the middle of next year, hit by interest rate cuts and slowing growth, according to predictions by Morgan Stanley.
A popular gauge of the dollar will fall around 9% from current levels by around this time next year, strategists including Matthew Hornbach predicted in a May 31 note. That will exacerbate a recent decline in the greenback, as trade turmoil weighs on the currency.
“We think rates and currency markets have embarked on sizeable trends that will be sustained — taking the US dollar much lower and yield curves much steeper — after two years of swing trading within wide ranges,” the strategists wrote.
The Morgan Stanley report adds to a chorus of voices questioning the outlook for the dollar, as traders and analysts weigh up US President Donald Trump’s disruptive approach to trade.
JPMorgan Chase & Co. strategists led by Meera Chandan told investors last week they remain bearish on the US currency, instead recommending bets on the yen, euro and Australian dollar.
See also: Goldman sees yuan reaching 7 per US dollar as trade talks progress
The US Dollar Index has dropped nearly 10% since a February peak as Trump’s trade policies dent sentiment on US assets and trigger a rethink on the world’s reliance on the greenback.
Still, the bearishness is far from historical extremes, underscoring the potential for more dollar weakness ahead, Commodity Futures Trading Commission data showed.
The biggest winners from dollar weakness will be the euro, yen and Swiss franc, widely regarded as the greenback’s rivals as global safe havens, the Morgan Stanley strategists wrote.
See also: Hong Kong buys US dollars to maintain FX peg in first since 2020
They see the euro rising to around the 1.25 level next year from around 1.13 now as the dollar slides.
The pound may also advance from 1.35 to 1.45, aided by “high carry” — the return investors can get from holding the currency — and the UK’s low trade tension risks.
The yen, currently trading at around 143 per dollar, may strengthen to 130, the analysts said.
The bank said that 10-year Treasury yields will reach 4% by the end of this year, and stage a much larger decline next year as the US Federal Reserve delivers 175 basis points of rate cuts.
Chart: Bloomberg
