Dollar's Resilience: Morgan Stanley Predicts Bullish Rebound Amidst Current Weakness

　　News Summary: Morgan Stanley forecasts that the U.S. dollar, currently under pressure from bearish bets, is poised for a rebound as real yields may increase, despite the recent decline in the dollar index.

　　Lead: Morgan Stanley (NYSE: MS) announced on Tuesday that, despite recent bearish sentiment surrounding the U.S. dollar, the currency's fortunes are likely to shift as real yields are expected to rise, leading to a potential recovery for the dollar index, which lowered to 89.94 earlier this week.

　　Main Body:

　　The U.S. dollar index, a measure of the currency's value relative to a basket of six major currencies, recently saw a decline of 0.21%, reaching the value of 89.94. This dip comes amid widespread bearish sentiment among investors, who have positioned themselves negatively towards the dollar in expectation of further weakness. Morgan Stanley, however, countered this narrative, suggesting that the time to consider long positions on the dollar has arrived.

　　In a recent note, Morgan Stanley pointed out, "We've seen some modest USD weakness recently and now believe the time has come to start scaling into long USD positions." The firm acknowledges that this perspective is somewhat controversial and not widely accepted even among its clients, many of whom remain bearish on the small greenback.

　　Analysts suggest that real U.S. yields have bottomed out and that the potential for further downside is limited. Expectations surrounding the Federal Reserves monetary policy indicate a likelihood of tapering bond purchases early in 2022 as efforts to control inflation become more pronounced. The current breakeven rates forecast inflation levels in the U.S. between 2.4% and 2.6% in the coming years.

　　Morgan Stanley elaborated, stating, “It is difficult for real yields to head much lower, given where inflation breakevens are in the U.S. and the continued progress of the U.S. economy that we think will be keeping the Fed on track to taper asset purchases in early 2022.”

　　Despite this outlook for the dollar, other analysts warn that rate hikes may not be enough to propel the dollar significantly higher. Increased demand for the euro, attributed to the recovery within the euro-area economy, is a concern. Morgan Stanley noted that the euro has not made substantial advances against the dollar in recent weeks, even amid positive economic data from the region.

　　Reflecting this sentiment, Morgan Stanley observed, “The euro failed to make any headway against the USD over the past two to three weeks despite the strong data and positive headlines from the region.” This highlights the ongoing struggle for the euro to gain ground against the dollar amid prevailing market uncertainties.

　　Compounding these factors, the upcoming consumer CPI report on Thursday will provide further insights into inflation trends, which are critical to understanding the future trajectory of the dollar. The responsiveness of the dollar to inflation data underscores the sensitive balance that exists between economic indicators and currency valuations in foreign exchange markets.

　　Market participants continue to keep a close eye on the evolving dynamics, as they contemplate the effects that fiscal and monetary policy changes may have on future exchange rates. With ongoing economic discussions, the path ahead for the U.S. dollar appears fraught with volatility and potential shifts.

　　Conclusion:

　　In summary, despite facing significant bearish pressure recently, the U.S. dollar may be positioned for a surprising rebound according to Morgan Stanley's analysis. Factors such as expected increases in real yields and the Federal Reserve's approaching policy decisions may contribute to this shift. However, competing currencies, particularly the euro, could challenge the dollar‘s recovery. Investors are advised to closely monitor economic indicators such as inflation reports that could shape the dollar’s trajectory in the coming months.

　　Sources:

• Investing.com - Dollar Battered, Bruised But Set to Escape Bearish Clutches
• OFX - US Dollar Forecast & Predictions
• Capital.com - USD Forecast
• FXEmpire - DXY Price Forecasts Today
• Trading Economics - Currency Forecasts

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