New forecast from Morgan Stanley

Morgan Stanley has downgraded its outlook for the dollar, citing the decline in US Treasury yields following the dovish stance of the US Federal Reserve (Fed). The bank shifted its outlook for the dollar from bullish to neutral, while also noting that there could still be upward movement due to seasonality and the impact of short-covering.

Morgan Stanley had been positioned for a stronger dollar since mid-November and had previously estimated that the Dollar Spot Index would strengthen by approximately 8 percent from current levels in the second quarter.

US INTEREST RATES FELL SHARPLY

In a research note published today, Morgan Stanley strategists, including David Adams, stated, "Our conviction in dollar strength has diminished meaningfully. The slowdown in US data has compressed growth differentials, US rates have fallen more than their peers, and investors appear to be moving away from defensive positions based on equity returns."

Morgan Stanley also closed its short Euro-dollar trade recommendation, advising investors to take a short Euro-yen position instead. The bank predicts that the yen will gain as US interest rates fall, and that the euro will decline as the Eurozone economy continues to weaken. Adams added, "A cloudier outlook for the dollar does not change the fundamentals of other G3 currencies."