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# Dollar's Resilience: A Rebound from Bearish Predictions

The U.S. dollar is showing signs of recovery against persistent bearish pressures as analysts from Morgan Stanley suggest improved real yields could provide the impetus needed for a turnaround.

　　In a notable shift in sentiment, the U.S. dollar, often criticized for its recent underperformance, may be on the brink of a recovery. Morgan Stanley, a leading financial services firm, announced that now is the time for investors to consider scaling into long positions on the dollar after having witnessed slight weakness recently. The firm pointed out that the U.S. dollar index, which measures the greenback against six other major currencies, has slipped 0.21% to 89.94, but they foresee an upturn due to the anticipated rise in real yields linked to U.S. bond purchases tapering in early 2022. This potential for increased yields comes as inflation expectations remain steady, with the U.S. breakeven rates pointing to future inflation in the range of 2.4% to 2.6%.

The Dollar's Recent Performance

　　Recent market movements have reflected a battle for the dollar's strength amid recession concerns. Analysts have long noted that the dollar remains challenged by negative sentiment, with many investors still bearish. Despite this, Morgan Stanley acknowledged that the firm‘s forecasts may not align with prevailing client sentiments, as the majority maintain positions reflecting skepticism toward the dollar's resilience. However, they also argue that real U.S. yields have been constrained for extended periods, and there’s limited space for further downside. "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 economy," they stated.

　　In parallel, recent nonfarm payrolls revisions revealed a downside adjustment of 818,000 jobs—less severe than the feared over-a-million drop, which has eased out some fears surrounding the dollar's trajectory. The dollar index recovered to about 101.50 amid these developments, snapping a losing streak.

External Influences and Rate Expectations

　　Amid these stabilizing factors, broader economic parameters still pose challenges. The Federal Reserve's anticipated strategies involving potential interest rate hikes and tapering bond purchases will be crucial for the dollar's future success. The likelihood of rate increases is now closely monitored by the market, with futures suggesting about a 69.5% chance for a 25-basis-point cut versus 30.5% for a 50-basis-point cut in September. Some key economic indicators, including consumer price index (CPI) data, are set for release shortly, which will further inform market expectations.

　　Morgan Stanley's bullish commentary does face roadblocks, particularly from the eurozone's ongoing recovery momentum impacting the euro's strength against the dollar. Their analysts pointed out that much of the euro's gains driven by expectations of a solid EU recovery seem to be priced in, indicated by the euro failing to strengthen against the dollar recently, even as positive economic data flowed from the region.

Looking Forward: Factors to Watch

　　The coming weeks will be crucial for the dollar as various economic reports are expected, providing insights into inflation, consumer behaviors, and job markets. The nonfarm payrolls benchmark revision may not cover August but contributes to a nuanced outlook for the dollar's recovery efforts.

　　As the market awaits further clarity, trading expectations remain tightly wound around Fed officials' upcoming speaking engagements and Fed meeting minutes. Investors will be keenly observing whether the economic data over the next few weeks will support the optimistic liquidity measures some analysts propose.

　　In summary, the U.S. dollar, though battered and bruised, finds itself at a potential inflection point. With Morgan Stanley advocating for a bullish position amidst changes in real yield expectations and revised nonfarm payrolls, forex traders will be watching closely. The interplay between U.S. domestic performance and foreign currency flows will ultimately dictate the dollars path in the coming months.