Morgan Stanley Predicts 12-Month US Dollar Weakness Due to Converging Interest Rates

Morgan Stanley research strategists Vishwanath Tirupattur and Serena Tang have highlighted a significant trend in their latest report. They anticipate that the US dollar will continue to weaken over the next 12 months. This prediction is based on the convergence of US interest rates and economic growth with those of other major economies. As a result, the dollar is expected to face increased selling pressure, particularly due to the inflow of FX hedge fund flows, which has elevated the risk premium.
The strategists noted that safe-haven currencies such as the Japanese Yen, Swiss Franc, and Euro are likely to benefit from this trend. The continued weakness of the US dollar is seen as a key theme for the coming year, driven by the expectation that US economic indicators will align more closely with those of its peers. This alignment is anticipated to reduce the relative attractiveness of the US dollar, leading to further depreciation.
The increased flow of FX hedge fund flows has added to the selling pressure on the dollar. This is because hedge funds are seeking to hedge their currency risks, which involves selling the US dollar in favor of other currencies. The rise in risk premium further exacerbates this trend, as investors become more risk-averse and seek safer assets.
According to the analysts' forecast, the Japanese Yen, Swiss Franc, and Euro are expected to gain from the US dollar's weakness. These currencies are traditionally seen as safe havens during times of economic uncertainty, and their appeal is likely to increase as the US dollar loses its luster. The convergence of US interest rates and economic growth with those of other major economies is a key factor in this shift, as it reduces the relative attractiveness of the US dollar.
The continued weakness of the US dollar is expected to have significant implications for global markets. As the dollar depreciates, other currencies are likely to appreciate, leading to changes in exchange rates and trade dynamics. This trend is expected to persist over the next 12 months, driven by the convergence of US economic indicators with those of other major economies. The increased flow of FX hedge fund flows and the rise in risk premium are also expected to contribute to this trend, as investors seek to hedge their currency risks and reduce their exposure to the US dollar.

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