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Wall Street sees deeper rout as dollar nears 2023 low

A worker counts U.S. dollar bank notes at a currency exchange office in Jakarta, Indonesia, in March 2022. (Dimas Ardian/Bloomberg)
By Ruth Carson, Aline Oyamada and Anya Andrianova Bloomberg

Wall Street banks are reinforcing their calls that the dollar will weaken further, hit by interest-rate cuts, slowing economic growth and President Donald Trump’s trade and tax policies.

Morgan Stanley said the greenback will tumble to levels last seen during the Covid-19 pandemic by the middle of next year, while JPMorgan Chase & Co. remains bearish on the US currency. Goldman Sachs Group Inc. said Washington’s efforts to explore alternative revenue sources - should tariffs be impeded - may be even more negative for the dollar.

“Headwinds for the dollar could come in the form of further bond market weakness, an escalation in the trade war, softer US data,” said Skylar Montgomery Koning, a currency strategist at Barclays Plc.

The dollar fell against all its peers in the Group of 10 on Monday amid a flare-up in global trade tensions. The Bloomberg Dollar Spot Index extended its decline further on a report that US factory activity contracted in May for a third consecutive month. The gauge fell 0.6% on the day, nearing its weakest level since 2023.

Trump’s trade policies have dented sentiment on US assets and triggered a re-think on the world’s reliance on the greenback. Still, the bearishness is far from extremes, underscoring the potential for more dollar weakness ahead, Commodity Futures Trading Commission data showed.

“We think rates and currency markets have embarked on sizable trends that will be sustained - taking the US dollar much lower and yield curves much steeper - after two years of swing trading within wide ranges,” Morgan Stanley strategists including Matthew Hornbach wrote in a May 31 note.

The bank forecasts the US Dollar Index will fall about 9% to hit 91 by around this time next year.

JPMorgan strategists led by Meera Chandan reinforced their negative view for the dollar last week, instead recommending bets on the yen, euro and Australian dollar. Morgan Stanley also listed the euro and the yen among the biggest winners from the greenback’s slide, along with the Swiss franc.

The euro climbed to a more than five-week high to as much as $1.1450 on Monday. Morgan Stanley sees it rising to around $1.25 next year. The bank also said the pound may advance from about $1.35 to $1.45, aided by “high carry” - the return investors can get from holding the currency - and the UK’s low trade tension risks. The yen may strengthen to 130, the analysts added.

The Japanese currency jumped as much as 1% Monday to trade at 142.54 per US dollar. The Australian dollar rose 1% as well.

Morgan Stanley also said the 10-year US Treasury yield will reach 4% by the end of this year, and stage a much larger decline next year as the Federal Reserve delivers 175 basis points of interest-rate cuts.

Investors are looking to a slew of US labor-market indicators this week, including the May employment report, for help in determining the next shifts in Fed policy and its implications for the dollar. They will also closely follow any developments on trade negotiations after China and the US accused each other of violating a deal concluded last month.

Tax Risk

For Goldman Sachs, investors are particularly focused on a potential change to US tax rates on foreign individuals and companies. The measure is buried deep in the tax-and-spending bill that Trump is muscling through Congress, and it calls for, among other things, higher taxes on passive income - such as interest and dividends - earned by investors who are potentially sitting on trillions in American assets.

“Even if the application is relatively narrow, such a tool would exacerbate concerns about risks of US investments, at a time when investors are already looking at shifting cross-asset correlations as a reason to seek greater diversification away from US assets,” strategists including Kamakshya Trivedi and Michael Cahill wrote in a note.

In a separate report, Goldman Sachs strategists said their models suggest the dollar is about 15% overvalued and therefore it has further to fall. The decline will likely be driven by reallocation and repricing of global assets, they added.