Market News

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.

“We think a medium-term narrative around a weaker dollar is building,” said Aroop Chatterjee, a strategist at Wells Fargo in New York.

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 intraday 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.

“Investors outside of the US are taking a second look at their exposures to the US both in terms of asset holdings but also in terms of the currency exposure that they have related to those asset holdings,” Matthew Hornbach, global head of macro strategy at Morgan Stanley, told Bloomberg TV Monday. “They take up their hedging ratios and that is one of the factors that will be putting downward pressure on the dollar over the next 12 months.”

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 in a note that 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.

“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.

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.

Diminishing US growth exceptionalism, uneven policy implementation by the US administration, persistent portfolio outflows are pressuring the dollar in near term, according to Paresh Upadhyaya at Pioneer Investments, who expects the Bloomberg dollar gauge to depreciate 10% during the next 12 months.

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.

--With assistance from Masaki Kondo and Jiyeun Lee.

(Updates prices throughout.)