Dollar forecast from Morgan Stanley: It will lose momentum soon!

As the dollar gains value amid recent tensions in the Middle East, financial circles are in agreement that this rise may be temporary. While the attacks carried out by the US and Israel against Iran on February 28 caused fluctuations in global markets, investors turned to the dollar as a safe haven. During this process, the index tracking the dollar's value has shown a 2 percent increase since the start of the war, reaching its highest level since December. In contrast, the euro and the yen have lost more than 2 percent of their value in the same period due to Europe and Japan's external dependence on energy.

ANALYSTS DO NOT EXPECT THE RALLY TO CONTINUE

Strategists at Morgan Stanley, one of the institutions closely watched in the financial sector, described the current rise as a "bull trap" in their latest note. The team led by David Adams stated, "A rally at this level is most likely a 'bull trap'; that is, a head-fake where price action draws investors in and then suddenly reverses. While the market has priced in the inflation risk created by high energy prices, it has not yet fully reflected the negative impact on growth."

According to recent statements, while the rise in energy prices fuels inflation concerns, investors have brought the possibility of interest rate hikes to the forefront, especially in Europe. Yet, in the period before the conflict, interest rate cuts were expected from the European Central Bank.

CENTRAL BANK POLICIES ARE BEING CLOSELY MONITORED

Morgan Stanley's assessment also points to the possibility that the approaches of leading central banks may diverge. It is projected that the Federal Reserve will likely ignore the "transitory inflation shock" and focus on economic growth, carrying out two interest rate cuts this year. As for the European Central Bank, strategists noted that a half-point interest rate hike is on the table in response to inflationary pressures. Analysts stated, "The interaction between inflation and growth creates a difficult equation for central bankers, and policy outcomes differ according to the balance between these forces."

Investor sentiment has also come to the fore once again with recent data. According to the Commodity Futures Trading Commission (CFTC) report, in the week leading up to March 17, investors took a net long position against the dollar for the first time this year. Furthermore, as noted by Citadel Securities, the focus of the markets has begun to shift from the initial shock to the potential effects on global growth.

Experts point out that it is possible for interest rates to move against the dollar based on both actual and market pricing. Recent developments indicate that the coming period in currency markets will be quite volatile.

News Source: 12punto