Morgan Stanley Drops Contrarian Bet For Dollar To Rally In 2024

(Bloomberg) -- Morgan Stanley, one of the few remaining dollar bulls, downgraded its outlook for the US currency citing declining Treasury yields following the Federal Reserve's dovish pivot. 

The bank changed its outlook for the greenback to neutral from bullish, noting that seasonality and short positioning could potentially still drive further upside. The bank had been betting on a stronger dollar since at least mid-November, previously forecasting that the Dollar Spot Index would strengthen about 8% from current levels in the second quarter.

Hedge funds and banks including Goldman Sachs Group turned bearish on the greenback in December after Federal Reserve Chair Jerome Powell signaled a shift to cutting rates this year. The dollar index subsequently plunged to a five-month low before rallying in the first four days of January. It was down 0.2% on Thursday.

“Our conviction about dollar strength has waned meaningfully,” strategists including David Adams wrote in a note published Jan. 4. “US data deceleration has compressed growth differentials, US rates have fallen further compared with peers, and investors appear far from defensive based on equity returns.”

Fidelity International, JPMorgan Chase & Co., and HSBC Holdings Plc were among a minority of money managers that went against consensus in December, warning that the dollar will surprise by getting stronger in 2024 as the US economy outperforms. A weaker dollar is the majority view among analysts surveyed by Bloomberg.

Morgan Stanley also closed its short euro-dollar trade recommendation, suggesting investors play a short euro-yen position instead. The bank forecasts that the yen will gain as US rates fall and the euro will drop as the euro-area economy continues to weaken.

“The cloudier outlook for the dollar doesn't change the fundamentals for the other G3 currencies,” Adams said. 

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