Morgan Stanley Predicts 9% Dollar Decline by Mid-2024

Morgan Stanley has projected that the U.S. dollar will depreciate by approximately 9% by mid-2024, driven by expectations of economic slowdown and interest rate cuts. This forecast is part of a broader trend where the dollar has been under pressure due to trade uncertainties and the lingering effects of the COVID-19 pandemic. The firm's strategists, including Matthew Hornbach, anticipate that a commonly used dollar index will fall to levels last seen during the pandemic, exacerbating the recent downward trend in the currency's value.

The strategists at Morgan Stanley have noted that the current environment, characterized by lower interest rates and a flattening yield curve, is conducive to a sustained decline in the dollar. This view aligns with the broader market sentiment, which has been increasingly skeptical of the dollar's prospects due to the disruptive trade policies of Donald Trump. These policies have eroded market confidence in U.S. assets and sparked a reevaluation of the global reliance on the dollar.

The dollar index has already declined by nearly 10% from its February peak, reflecting the market's growing concerns. However, the current level of bearish sentiment, as indicated by data from the Commodity Futures Trading Commission, suggests that there is still room for further depreciation. Morgan Stanley's strategists identify the euro, Japanese yen, and Swiss franc as the primary beneficiaries of the dollar's weakness, given their status as alternative safe-haven currencies.

The firm expects the euro to appreciate against the dollar, with the exchange rate potentially rising from the current level of approximately 1.13 to around 1.25 by the end of next year. The British pound is also anticipated to strengthen, moving from 1.35 to 1.45, driven by lower geopolitical risks and higher carry returns. The Japanese yen, currently trading at around 143 per dollar, is projected to appreciate to 130 per dollar.

Morgan Stanley's analysis also extends to the U.S. Treasury market, where they predict that the 10-year yield will peak at 4% by the end of this year before declining sharply as the Federal Reserve implements a series of rate cuts totaling 175 basis points. This forecast underscores the firm's bearish outlook on the dollar, which is expected to face continued headwinds from both domestic and international factors.