Morgan Stanley turns neutral on dollar with bullish bias
Morgan Stanley has shifted its stance on the US dollar, adopting a neutral view with a bullish skew, recommending a "buy the dips" strategy. This marks a reversal from its earlier outright bullish position, as the bank previously admitted its weak-dollar forecast was incorrect. The revised outlook comes after a weaker-than-expected September US payrolls report reduced expectations for a Federal Reserve rate hike in October.
The bank remains bearish on the yen, expecting carry trades to keep the USD/JPY pair near the upper end of its range. This view is supported by the wide interest rate gap between the US and Japan, which continues to attract yen-funded carry trades. Morgan Stanley has also warned of potential Japanese intervention to support the yen, particularly if dollar strength persists.
In terms of currency positioning, Morgan Stanley favors the Norwegian krone against the euro and Swedish krona as a hedge against higher energy prices. Norway's status as a major energy exporter makes the krone a beneficiary if Middle East supply concerns resurface. Meanwhile, the euro faces additional pressure from widening French spreads and Europe's exposure to rising energy costs.
The bank's strategists, led by David Adams, had earlier raised their year-end forecast for the dollar index to 102 and cut their euro forecast to 1.12 against the dollar. They projected further dollar gains into mid-2027, citing fiscal and political concerns in Europe. However, the recent shift to a neutral stance with a bullish bias reflects the bank's adjusted outlook in response to changing market conditions.