Wall Street Sees Deeper Rout as Dollar Nears 2023 Low

Wall Street banks, including Morgan Stanley, JPMorgan, and Goldman Sachs, are reinforcing their bearish outlook on the US dollar, citing anticipated interest-rate cuts, slowing US economic growth, and the impact of trade and tax policies. The Bloomberg Dollar Spot Index fell 0.6% amid trade tensions and contracting US factory activity, nearing its weakest level since 2023, with Morgan Stanley forecasting a 9% decline in the US Dollar Index to 91 by next year and recommending investors favor the yen, euro, and Australian dollar.

Analysis

Leading Wall Street institutions, including Morgan Stanley, JPMorgan Chase & Co., and Goldman Sachs Group Inc., are amplifying their bearish stance on the U.S. dollar, forecasting further depreciation. This outlook is primarily driven by anticipated U.S. interest-rate cuts, slowing domestic economic growth, and the repercussions of President Donald Trump’s trade and tax policies. The Bloomberg Dollar Spot Index recently declined 0.6%, approaching its weakest intraday level since 2023, following a report indicating U.S. factory activity contracted for a third consecutive month in May. Morgan Stanley projects the U.S. Dollar Index will fall approximately 9% to a level of 91 by mid-next year, a low not witnessed since the COVID-19 pandemic. This sentiment is echoed by declining investor confidence in U.S. assets and a strategic re-evaluation of global reliance on the greenback, leading to increased currency hedging by international investors, as noted by Morgan Stanley's Matthew Hornbach. Strategists are consequently recommending positions in currencies like the yen, euro, and Australian dollar. Specifically, Morgan Stanley anticipates the euro could reach $1.25 and the pound sterling $1.45, benefiting from high carry and lower trade tension risks for the UK, while the yen is projected to strengthen to 130 against the dollar. Goldman Sachs further warns that U.S. efforts to find alternative revenue sources, should tariffs be obstructed, could exert even greater negative pressure on the dollar. The prevailing sentiment, as indicated by a sentiment score of -0.7 (strongly negative), and a market impact score of 0.7, underscores the significant potential for continued dollar weakness.

Key Decisions for Investors

• Investors should consider re-evaluating their U.S. dollar exposure and explore strategies to hedge against potential further depreciation, given the reinforced bearish calls from major financial institutions.
• Opportunities may arise from taking long positions in currencies forecasted to strengthen against the dollar, such as the euro, Japanese yen, Australian dollar, Swiss franc, and British pound, based on specific bank targets like EUR/USD at $1.25 and GBP/USD at $1.45.
• Closely monitor upcoming U.S. economic data, Federal Reserve policy signals, and developments in U.S. trade and tax policies, as these are key drivers for the dollar's trajectory.
• Consider increasing hedging ratios for U.S. asset holdings to mitigate currency risk, particularly for non-U.S. based investors.