Morgan Stanley: Traders Biding Time to Sell Dollar

As the U.S. dollar continues its rally, traders are eagerly waiting for the opportune moment to sell, according to Morgan Stanley. The investment bank's analysts believe that the current strength of the greenback is driven by several factors, including a robust U.S. economy, fiscal and trade policies under a potential Trump presidency, and rising term premiums.



The U.S. economy is projected to grow at a healthy pace, with the IMF forecasting real GDP growth of 2.8% and 2.2% for 2024 and 2025, respectively. This outpaces its international peers, such as the Eurozone and Japan. Additionally, the likelihood of former President Donald Trump returning to the White House is supporting a higher USD and long-term Treasury yields. His fiscal and trade policies are perceived as inflationary, which could force the Fed to keep the policy rate restrictive for longer, underpinning a firmer USD.

Moreover, the term premium on 10-year Treasury yields implied by the ACM model has risen throughout October and neared a one-year high of 0.215%. This reflects investors' increased compensation required for holding long-dated Treasuries, driven by the U.S. fiscal outlook expected to worsen under a Trump presidency.

However, market participants' expectations of future U.S. fiscal and trade policies significantly influence their willingness to sell the dollar. The current polls and betting odds favor Trump, but a shift in these indicators could alter market participants' expectations, potentially leading to a decrease in the USD and long-term Treasury yields.

Central bank policies, both in the U.S. and abroad, also play a significant role in shaping the demand for and supply of the U.S. dollar. The Fed's hawkish stance, with two rate cuts expected in 2025, has led to strength in the US dollar and weakness in Asian currencies. This constrains Asian central banks from making aggressive rate reductions, even though Asia's inflation is within a comfortable range.

In the coming months, the Fed is expected to continue its hawkish stance, which could lead to a stronger U.S. dollar. However, foreign central banks may reduce their holdings of U.S. Treasury bonds, decreasing the supply of dollars and strengthening the U.S. dollar.

In conclusion, Morgan Stanley's analysis suggests that traders are waiting for the right moment to sell the dollar, as the current strength of the greenback is driven by several factors, including a robust U.S. economy, fiscal and trade policies under a potential Trump presidency, and rising term premiums. However, market participants' expectations of future U.S. fiscal and trade policies and central bank policies could evolve, potentially altering the USD's strength.