Morgan Stanley predicts that the US dollar index may fall by 9% next year, offering opportunities for the euro, yen, and other currencies.

Morgan Stanley's latest research report points out that, under the dual pressure of the Fed's rate cuts and slowing global economic growth, the US Dollar Index (DXY) may start a deep adjustment. The team led by Matthew Hornbach predicted in a report released on May 31 that by mid-2026, the US Dollar Index will fall by about 9% from the current level to 91 points, hitting a new low since the outbreak of the COVID-19 pandemic in 2020. This prediction resonates with the market's reassessment of the outlook for the US dollar, especially against the backdrop of the Trump administration's trade policies sparking a global rethink of the US dollar's status. The US Dollar Index has already fallen nearly 10% from its high in February 2025. The core logic of the report points to two major driving factors. Firstly, the shift in Fed policy will push real interest rates lower. Morgan Stanley expects the yield on the 10-year US bond to fall to 4.0% by the end of 2025, and with the Fed cutting rates by 175 basis points, there will be a greater decrease in the benchmark rate range in 2026, significantly weakening the attractiveness of US dollar assets. Secondly, the restructuring of the global trade landscape is reshaping the currency landscape. Policies such as tariffs imposed by the Trump administration not only impact market confidence but also prompt the international market to reassess the reserve currency status of the US dollar. Current data from the Commodity Futures Trading Commission (CFTC) shows that current bearish sentiment has not reached historically extreme levels, highlighting the potential for further weakening of the US dollar in the future. In the currency market, Morgan Stanley is bullish on three major non-US currencies: the Euro against the US dollar is expected to rise from the current 1.13 to 1.25, benefiting from the relatively cautious pace of rate cuts by the European Central Bank and the improved trade conditions brought about by the decline in energy prices; the yen, as a traditional safe-haven asset, may rise from 143 yen to 130 yen, especially against the backdrop of increased global uncertainty due to Trump's trade policy, the yen's hedging trade closure risk will continue to support its exchange rate; the British pound against the US dollar may rise from 1.35 to 1.45, primarily due to the relatively mild trade environment in the UK and the interest rate advantage brought about by the current high policy rate of 5.25%. It is worth noting that last week, Morgan Stanley's strategist team, led by Mira Chadan, simultaneously released a bearish signal on the US dollar, recommending investors to short the US dollar and instead favor the yen, euro, and Aussie dollar. In the early Asian trading session, the US Dollar Index continued its decline, with the Bloomberg US dollar spot index falling by 0.2%. Technically, if the key support level is broken, it may trigger convergence selling by quantitative funds.