The dollar faces further weakness, but should recover next year

The decline in the US dollar may still have room to continue as the US economy is expected to weaken in the coming months, but economic recovery will lift the currency next year, according to Morgan Stanley.

“The U.S. economy has been very strong over the last few quarters, and we see it weakening in the fourth quarter and first quarter of next year and then starting to pick up again,” James Lord, head of FX and emerging markets strategy at Morgan Stanley, said in an interview.

“The dollar then rebounds as the year progresses. But we think in the next three to six months or so, we will be in a weaker state.”

The US currency is also likely to be the dominant driver of currency movements more broadly, and many other regions have less attractive prospects.

“A lot of the volatility in the macro cycle is actually driven by the US,” Lord said.

Morgan Stanley expects the euro EURUSD to reach $1.23 against the greenback, before the US dollar rebounds. It was $1.16 on Monday. The DXY dollar index is also expected to fall to 94, from 99 on Monday, before rising back to 99 by the end of 2026.
Source: Reuters