“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: Expect further declines in the US dollar: JP Morgan Private Bank
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: Taiwan life insurers caught in dilemma with costly FX hedges
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
