The dollar’s recent resilience should not be mistaken for the end of its downturn, according to Morgan Stanley, which argues that the U.S. currency’s bear market still has further to run.
Despite a slide in front-end Treasury yields and political noise around the Federal Reserve, the greenback has held steady.
Some investors see this as a sign that the dollar’s decline has already played out, supported by U.S. equities outperforming global peers and the perception that the American economy can absorb import tariffs more easily than others.
Yet Morgan Stanley strategist James K. Lord opposes that view.
“We are not convinced that the dollar’s downtrend has run its course – on the contrary, we think its decline is barely halfway through,” he said in a Sunday note.
The bank’s economics team expects U.S. GDP growth to slow to around 1% by the fourth quarter of 2025 and stay only slightly higher in 2026, levels that hardly signal outperformance relative to the rest of the world.
A weaker labor market adds to the downside risks. Lower growth, coupled with the Fed’s readiness to tolerate inflation above target, could push real yields lower. Historically, that has been a headwind for the dollar.
Morgan Stanley’s rates team remains positioned for further easing, holding a long in the five-year Treasury note on expectations that the front end of the curve could price a deeper cycle.
This could reinforce dollar weakness by encouraging foreign investors to hedge their U.S. assets.
While the Fed has lowered the bar for cutting rates, the European Central Bank (ECB) has raised it, and the Bank of England (BoE) has struck a more hawkish tone, a policy mix that also favors a weaker dollar.
“Our view remains that the dollar will weaken over the remainder of the year,” the bank said.
Concerns about fiscal sustainability in Europe and the U.K. are often cited by dollar bulls, but Lord believes that the U.S. is not immune to the same issues.
In his view, uncertainty around growth, monetary policy, and fiscal dynamics will continue to weigh on the greenback.
Source :
https://www.investing.com/news/forex-news/the-dollar-bear-market-isnt-over-morgan-stanley-says-4228451
