Morgan Stanley Shorts Dollar, Targets 7% Yen Gain Amid Recession Fears

Morgan Stanley has revised its strategy to go long on the Japanese yen, citing growing concerns over a potential U.S. economic recession. The financial institution's team, led by Koichi Sugisaki and David Adams, has adjusted its strategy to short the U.S. dollar against the yen at 146.40, with a target of 135 (previously 145) and a stop-loss set at 151. This move comes in response to the announcement of reciprocal tariffs, which could weaken economic data and increase the perceived risk of a U.S. economic downturn. The team anticipates that the yen could appreciate by approximately 7% against the dollar under these conditions.

The adjustment in Morgan Stanley's strategy reflects a broader sentiment of caution in the financial markets. The uncertainty surrounding U.S. trade policies and the potential for economic slowdown has led to a reassessment of currency positions. The yen, traditionally seen as a safe-haven asset, is expected to benefit from increased risk aversion among investors. The team's recommendation to short the dollar at 146.40 and target 135 indicates a significant shift in their outlook, suggesting that they believe the yen will strengthen considerably against the dollar.

Strategy experts point out that domestic participants in Japan, such as pension funds, have been buying the dollar/yen pair at lower levels during rebalancing, which helps explain the relative strength of this currency pair in recent weeks. However, if market expectations are that the Federal Reserve's terminal interest rate will reach around 2.75% by the end of next year, as predicted by Morgan Stanley's economists, then the dollar/yen should fall to 135, about 7% lower than the current level.

The Federal Reserve's stance on interest rates and economic conditions has also played a role in shaping market expectations. The uncertainty surrounding U.S. trade policies and the potential for economic slowdown has led to a reassessment of currency positions. The yen, traditionally seen as a safe-haven asset, is expected to benefit from increased risk aversion among investors. The team's recommendation to short the dollar at 146.40 and target 135 underscores their belief that the yen will continue to strengthen as concerns over a U.S. economic recession grow.