As one of the few dollar bulls in the market, Morgan Stanley lowered its outlook on the dollar on Thursday, citing the declining yield of US treasury bond bonds after the Federal Reserve turned to dove.
The bank adjusted the outlook for the US dollar from bullish to neutral, but pointed out that seasonal factors and short positions may still push the US dollar further upwards.
Morgan Stanley has been betting on a stronger US dollar since at least mid November last year, with the bank predicting that the US dollar spot index (DXY) is expected to rise by about 8% from current levels in the second quarter.
Last December, after Federal Reserve Chairman Powell hinted at a shift towards interest rate cuts this year, hedge funds and big banks including Goldman Sachs began to turn bearish on the US dollar.
The US dollar index subsequently fell to a 5-month low, but rebounded in the first four days of January this year. On Thursday, the index fell 0.2%.
After the Federal Reserve issued a policy shift signal at its last meeting, market expectations for a rate cut have significantly increased. But in recent days, the market has lowered its bets on the Fed's interest rate cuts.
The minutes of the Federal Reserve policy meeting released on Wednesday were seen by market participants as moderate hawks. The better than expected US labor market data (ADP) released on Thursday hit expectations that the Federal Reserve will cut interest rates multiple times this year. On Friday, the United States will release its latest non farm payroll report, which may provide more clues to the outlook of the Federal Reserve's policy.
According to the probability application of the London Stock Exchange, after the release of ADP data on Thursday, US interest rate futures are expected to reduce the number of interest rate cuts in 2024 from about 6 on Wednesday evening to 4, with each cut being 25 basis points.
The long end of the US dollar is one less
"Our confidence in the strength of the US dollar has significantly weakened," wrote Da Mo strategists including David Adams in a report released on January 4th.
Morgan Stanley lowered its outlook for the US dollar, which means one of the few dollar bulls in the market is missing.
Last December, a few institutions including Fidelity International, JPMorgan Chase, and HSBC opposed the prevailing market view and warned that the US dollar would unexpectedly strengthen in 2024 as the US economy performed well.
These dollar bulls expect that the economies of other regions around the world will find it harder to cope with high interest rates and are approaching an economic recession than the United States. Although the Federal Reserve has hinted at plans to cut interest rates by 75 basis points in 2024, they expect other major economies from Europe to emerging markets to take similar or even faster rate cuts, leading to widening interest rate spreads.
Most analysts surveyed by foreign media believe that the US dollar will weaken.
Morgan Stanley also withdrew its trading advice to short the euro/dollar and instead advised investors to short the euro/yen. The bank predicts that as US interest rates fall, the yen will appreciate, and as the eurozone economy continues to weaken, the euro will depreciate.