Morgan Stanley has projected a depreciation of the U.S. dollar over the next 12 months, with the currency expected to fall to 91 by mid-2026.
The forecast signals a potential 9% decline from current levels as the Federal Reserve prepares to cut interest rates amid slowing economic growth.
The U.S. Dollar Index, which measures the greenback against a basket of major global currencies, has already lost close to 10% since peaking in February 2025.
The investment bank attributes the expected decline to structural market shifts, including monetary policy easing and rising global skepticism toward U.S. trade policy.
“We think rates and currency markets have embarked on sizeable trends that will be sustained — taking the U.S. dollar much lower and yield curves much steeper — after two years of swing trading within wide ranges,” wrote Matthew Hornbach and other Morgan Stanley strategists.
The dollar’s weakness comes as the Federal Reserve is expected to implement an aggressive monetary easing cycle.
According to the bank, the Fed could cut rates by as much as 175 basis points in 2026, a shift that would materially reduce yield differentials and pressure the dollar further.
The bearish sentiment is compounded by rising global trade uncertainty, largely influenced by the policy stance of former U.S. President Donald Trump, who has pledged to double tariffs on foreign steel and aluminum to 50%.
This posture has reignited market fears of a broader protectionist shift, which could weigh further on U.S. assets.
Commodity Futures Trading Commission (CFTC) data released on May 27 indicates that aggregate net short positions against the dollar remain near their highest level since 2023.
In contrast, Morgan Stanley anticipates gains for rival currencies, particularly those considered global safe havens.
The euro is forecast to strengthen from 1.13 to 1.25 while the Japanese yen could appreciate to 130 per dollar from its current level near 143.
The pound, currently trading around 1.35, may rise to 1.45 by next year, supported by favorable carry conditions and limited trade tensions with global partners.
Strategists at JPMorgan Chase & Co. have also echoed similar views, advising investors to remain underweight on the dollar and consider long positions in the euro, yen and Australian dollar.
While the Bloomberg Dollar Spot Index declined 0.2% in early Asian trading on Monday, broader market participants remain cautious as the Federal Reserve prepares for a potential policy pivot.
Morgan Stanley expects U.S. 10-year Treasury yields to reach 4% by year-end before beginning a more pronounced decline in 2026.
The projected trajectory for the dollar marks a departure from its historical strength during periods of global uncertainty.
The evolving macroeconomic landscape, combined with policy divergence and trade volatility, may reshape investor allocations and reduce the greenback’s dominance in global portfolios.
Market participants will be watching upcoming U.S. labor market data and Federal Reserve statements for further clarity on monetary policy direction and its implications for currency markets.
