The US Dollar's Troubling Trend: Morgan Stanley Forecasts Further Decline Amid Growing Economic Concerns

The year 2025 has begun with a stark warning for the US dollar, as it embarks on its worst start to a year since the global financial crisis in 2008 triggered a recession. The dollar's decline is attributed to multiple factors, including the risk of a federal government shutdown, slowing US growth, and rising asset values abroad. Morgan Stanley & Co.'s macro strategists have issued a dire warning, stating that these concerns will only intensify as President Donald Trump's April 2 tariff deadline approaches.

According to Bloomberg, a gauge measuring the dollar's health has plummeted by over 3% so far in 2025, marking its worst year-to-date performance since 2008. This downward trend is expected to continue, with strategists at Morgan Stanley predicting further losses for the currency as investors reassess their positions on US growth and future fiscal policy.

A Shift in Market Sentiment: Factors Weighing on US Growth

Morgan Stanley's bearish view on the dollar has been a notable outlier among Wall Street banks since late last year. However, their thesis has been vindicated by events unfolding so far in 2025. The firm's strategists point to several key factors contributing to the dollar's decline:

• A slide in US bond yields as traders bet on more Federal Reserve interest-rate cuts this year
• Softer economic data and confusion surrounding the new administration's trade policies
• Rising asset values abroad, particularly in Europe

These factors have underpinned the greenback's turn of fortune since January. The prospect of a near-term US government shutdown could further exacerbate the dollar's decline as investors reassess their positions on growth and future fiscal policy.

Morgan Stanley's Recommendations: Long Positions on the Euro, Pound, and Yen

Since January, Morgan Stanley has recommended going long the euro, pound, and yen. These currencies have risen sharply against the dollar in recent weeks due to factors such as:

• Tighter monetary policy from the Bank of Japan
• Historically low interest rates and a weakening economy
• A shift towards fiscal expansion in Germany and broader European Commission-level plans

On Thursday, Morgan Stanley updated their targets on these trade recommendations, forecasting further gains for each currency. Their revised targets include:

• Long yen targeting a roughly 2% move from current levels to 145
• Long euro targeting a roughly 3% rise to 1.12
• Long pound targeting a nearly 3% gain to 1.33

These recommendations are based on the firm's analysis of market trends and investor positioning in the options market.

Investor Sentiment: Trader Positioning and Market Volatility

The yen has strengthened by around 6.5% versus the dollar so far in 2025, outpacing nearly all of the US currency's major peers as investors bet on tighter monetary policy from the Bank of Japan. In contrast, other central banks, including the Federal Reserve, are implementing easing cycles.

Morgan Stanley notes that trader positioning in the options market is now long euro — a historically reliable signal that the single currency has more room to extend gains. This trend is attributed to factors such as:

• Germany's historic decision to upend decades of fiscal caution in announcing plans for greater defense and infrastructure spending
• Broader European Commission-level plans aiming to boost economic growth

Conclusion

The US dollar faces a challenging road ahead, with multiple factors contributing to its decline. Morgan Stanley's bearish view on the currency has been vindicated by events unfolding so far in 2025. The firm's strategists have issued a dire warning, stating that the risk of a federal government shutdown and slowing US growth will only intensify as President Trump's April 2 tariff deadline approaches.

Investors are advised to reassess their positions on US growth and future fiscal policy amid growing economic concerns. Morgan Stanley's recommendations for long positions on the euro, pound, and yen offer a potential opportunity for investors to capitalize on market trends and volatility.