Morgan Stanley expects the U.S. dollar to drop by about 9% by mid-2024. This forecast comes as U.S. economic growth slows and the Federal Reserve is likely to cut interest rates. The bank predicts that the euro will rise from around 1.13 to 1.25, and the British pound will increase from 1.35 to 1.45. Additionally, the Japanese yen is expected to strengthen from 143 to 130.

U.S. Ten-Year Treasury Yields

Morgan Stanley believes that 10-year U.S. Treasury yields will hit 4% by the end of 2025. After that, they expect a significant drop as the Fed may cut rates by 175 basis points next year. This outlook for the dollar aligns with predictions from other major financial institutions. Ongoing trade tensions from the Trump administration play a role in this view. Currencies like the euro, yen, and Swiss franc, seen as safe havens, are poised to benefit from a weaker dollar. Morgan Stanley’s latest insights indicate that the dollar will likely decline steadily throughout the year. This is due to a slowdown in the U.S. economy and changes in Federal Reserve policy. Signs of slowing growth may lead the Fed to implement a substantial reduction in rates. A 175 basis point cut suggests strong conviction behind these expectations. The firm’s forecasts for the euro, pound, and yen highlight how differences in interest rates could drive capital flows. By projecting the euro-dollar value to around 1.25, it suggests more investments may move from the U.S. to the eurozone. This is not due to a sudden surge in European growth but a shift in expectations around yields. The British pound is expected to follow a similar trend, aided by the Bank of England’s tighter monetary stance and some positive domestic data. The yen, often misinterpreted, stands to gain from lower yield fluctuations and the kind of risk sentiment that appears during a dollar decline.

Trade Policy and Market Perception

Yields on U.S. Treasuries are forecasted to peak near 4% on the 10-year note before dropping again. If this happens as predicted through late 2025, it will be important to reevaluate yield-curve strategies. Earlier expectations of a flattening yield curve might shift to a steeper curve as we move into the rate-cut phase. The sequence of these changes is crucial. It doesn’t just mean a drop in interest rates, but also a compression of returns on fixed-income investments and a likely reevaluation of U.S. asset premiums. Trade policies still show lingering influences from the previous administration. This situation is beyond just short-term tariffs; it reflects deeper shifts in how investors view long-term dollar-denominated assets in uncertain geopolitical climates. As a result, hedging behaviors will likely evolve gradually as more information becomes available. So, what should we keep an eye on? Cross-currency basis spreads will give us early signs of changing flow patterns. We’ve already seen slight increases in dollar funding costs relative to the euro and pound, indicating gradual adjustments in demand. Additionally, FX volatilities among G7 pairs are worth monitoring. They’re not just random fluctuations; they represent a recalibration of relative value. Currently, this isn’t about moving toward higher-beta currencies. Demand is gathering around stable options: the Swiss franc, yen, and euro. This is happening steadily, not chaotically. Bryan’s analysis of capital flows supports this idea: even small changes can have a big impact when liquidity is low. Timing is important. If you jump in too early, you might miss short-term gains, so a staggered approach could be wise. The best insights are found in implied volatility curves, where flattening patterns and relatively low skew offer chances for strategic entries. It’s not about large exposure but managing risk smartly. We’ve seen similar situations in the past. While they may not be identical, they share enough similarities to draw comparisons. The dollar’s trajectory is rarely straight, but the motivation for higher returns is clearly shifting. For now, we remain focused not just on the direction of G10 pairs, but also on the conviction behind those movements. That’s where true momentum either strengthens or weakens. Create your live VT Markets account and start trading now.

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