Morgan Stanley thinks the dollar has further to fall — to levels last reached during the pandemic — driven lower by interest rate cuts and the strength of rival currencies.
Strategists at the investment bank wrote in a report published over the weekend that they anticipate a 9% fall over the next 12 months to a value of 91 on the dollar index.
The index measures the value against a basket of six currencies: the euro, yen, pound, Swiss franc, Canadian dollar, and Swedish krona.
They said the greenback had declined faster than expected, already slumping to its year-end target price of 101 last month. It stood at 98.9 on Tuesday.
The dollar’s weakness is forecast to be most acute against safe-haven currencies such as the euro, yen, and franc, according to Morgan Stanley.
“We think rates and currency markets have embarked on sizeable trends that will be sustained — taking the US dollar much lower and yields curves much steeper — after two years of swing trading within wide ranges,” the strategists said.
They forecast a rise in the value of the euro against the dollar to $1.25 and the pound to $1.45 by mid-2026.
The US dollar index has fallen more than 10% since its mid-January highs of almost 110 reached soon before the inauguration of President Donald Trump and based on the expectation of rate cuts by the Federal Reserve.
The index rose again in February, but has since reversed course amid Trump’s tariffs and ensuing trade war.
The strategists forecast the yield on 10-year Treasurys to stand at 4% by the end of this year. “Treasury yields stage a much larger decline in 2026 as the Fed delivers 175 basis points of rate cuts on the back of weaker real growth and inflation moving back to target,” they wrote.
Morgan Stanley expects US GDP growth to come in at 1% both this year and in 2026. “Beyond tariffs, immigration restrictions also weigh on US growth, while we are skeptical of meaningful support from fiscal policy or deregulation,” its economists wrote.
The OECD said on Tuesday that the US economy would expand by 1.6% in 2025, down from its previous forecast of 2.8%.
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