Morgan Stanley has shifted to a bullish stance on the US dollar, now projecting that the greenback will climb roughly 3% against the euro by mid-2027, driven by rising US interest rates and robust economic growth.
In a report, Morgan Stanley's foreign exchange strategy team, led by David Adams, wrote: "We had expected the dollar to continue weakening in the second half of 2026, but we were wrong. We now forecast that dollar strength will persist through the end of the year and throughout 2027, driven by widening interest rate differentials between the US and the rest of the world, strong US economic growth, and rising European risk premiums that are bolstering the dollar."
The US investment bank expects the euro-to-dollar exchange rate to fall to 1.10 by the middle of next year, compared with its previous forecast of 1.16. It also lowered its year-end euro forecast from 1.20 to 1.12.
Currently, the euro is trading around 1.1380 against the dollar and is on track for a third consecutive weekly decline, which would mark its worst losing streak since January of this year.
Against the yen, strategists expect the dollar to rise to 163 in the first quarter. Against the pound, they forecast sterling will fall to 1.28. This reverses earlier expectations for strength in these currencies.
They said the Federal Reserve's more hawkish stance and superior US interest rates stand in sharp contrast to rising political risk premiums, which have been weighing on the euro. This dynamic suggests "a more favorable outlook for the dollar, rather than a weak one."
Morgan Stanley believes the dollar will gain against the euro, yen, and Swiss franc on the strength of carry trade advantages, while risk-sensitive currencies such as the Australian dollar and Norwegian krone are also expected to outperform.
However, the bank remains tactically neutral on the dollar, citing "the risk of a policy-driven increase in the dollar's negative risk premium, which could make the euro and yen safer funding currencies for carry trades."
Comments