(Bloomberg) – Wall Street banks are increasingly advocating for a weaker dollar amid interest rate cuts, slow economic growth, and support for President Donald Trump’s trade and tax policies.
According to analysts, the dollar is set to face challenges.
Advertisement: High Yield Saving Offer
This feature is powered by Money.com.
Morgan Stanley predicts the dollar will drop to levels seen during the COVID-19 pandemic by mid-next year. Meanwhile, JPMorgan Chase & Co. cautions that the dollar remains under pressure. Goldman Sachs indicates that Washington’s exploration of other revenue sources, especially when tariffs are a concern, could weigh even more heavily on the dollar’s value.
Anoop Chatterjee, a strategist at Wells Fargo in New York, mentioned that the dollar declined against all currencies in the G10 on Monday amid heightened global trade tensions. The Bloomberg Dollar Spot Index showed a continued drop in May, signaling a third consecutive downturn for US factory activities. On that day, the index slipped 0.6%, nearing its lowest level since 2023.
Trump’s trade policies are stirring debates around American assets and prompting reconsideration of global reliance on the dollar. Still, the degree of pessimism isn’t overwhelming, suggesting room for more weakness in the dollar moving forward, as indicated by data from the Commodity Futures Trading Commission.
Matthew Hornbach, global head of Macro Strategy at Morgan Stanley, noted on Bloomberg Television, “Investors outside of the US are reevaluating their exposure to American holdings, not only in terms of assets but also the associated currency risks.” He also pointed out that the hedge ratio might contribute to downward pressure on the dollar within the next 12 months.
The bank forecasts the US dollar index will drop around 9% to about 91 by next year.
JP Morgan strategist Meera Chandan echoed a negative outlook on the dollar last week, advising investors to consider the yen, euro, and Australian dollar. Morgan Stanley lists the euro and yen among the major beneficiaries of the dollar’s decline, along with the Swiss franc.
The euro reached $1.1450 on Monday, hitting a five-week high. Morgan Stanley anticipates it will climb to approximately $1.25 next year, while the pound could rise from about $1.35 to $1.45. Analysts expect the yen could strengthen to 130.
Japan’s currency gained 1% on Monday, trading at 142.54 per USD, while the Australian dollar also increased by 1%.
Morgan Stanley suggests that the US Treasury yield could hit 4% by the end of this year, with a larger decrease anticipated next year as the Federal Reserve considers interest cuts by 175 basis points.
Skylar Montgomery Koning, a currency strategist at Barclays PLC, remarked that investors are closely monitoring US labor market indicators this week, including a May employment report, to gauge potential shifts in Federal Reserve policy and its effects on the dollar. They are also paying attention to trade negotiations after recent accusations of violations involving a transaction concluded last month.
According to Paresh Upadhyaya, the inconsistent implementation of US policies and a decrease in permanent portfolio outflows are putting strain on the dollar. He predicts that the Bloomberg Dollar Gauge could depreciate by 10% within the next year.
Goldman Sachs notes investors are particularly concerned about potential shifts in US tax rates affecting foreigners and businesses, intricately woven into tax and spending initiatives championed by Trump. Higher taxes on passive income, such as interest and dividends, may dissuade investors from American assets.
They added that risk management tools will likely amplify concerns regarding US investment risk, especially as investors rethink cross-asset correlations that prompt diversification from US assets.
In a separate report, Goldman Sachs strategists suggested that the dollar needs to weaken further, as their models indicate it is overvalued by around 15%. They expect this decline will largely stem from reallocating and altering global asset risks.
