(Bloomberg) -- The dollar is already having its worst start to a year since the global financial crisis triggered a US recession, and Morgan Stanley & Co. sees more trouble ahead for the currency as fears about the health of the economy grow.
The risk of a federal government shutdown, slowing US growth, and rising asset values abroad are all set to drag the dollar lower in the lead up to President Donald Trump’s April 2 tariff deadline, the bank’s macro strategists warned clients Thursday. A Bloomberg gauge of the dollar’s health has slumped more than 3% so far in 2025, the measure’s worst year-to-date performance since 2008.
“Factors that had been seen as boosting US growth are now seen as potentially weighing on US growth,” strategists including Matthew Hornbach and Andrew Watrous wrote in a note. “The prospect of a near-term US government shutdown could further weigh on the dollar broadly as investors estimate the implications for growth and future fiscal policy.”
Morgan Stanley’s bearish view on the dollar has stood out on Wall Street since late last year, when many banks were predicting continued strength in the currency. So far in 2025 the bank’s thesis has been borne out.
A slide in US bond yields as traders bet on more Federal Reserve interest-rate cuts this year — coupled with softer economic data and confusion surrounding the new administration’s trade policies — has underpinned the greenback’s turn of fortune since January.
Investors are closely watching spending deliberations in the US Congress ahead of the impending closure of the federal government on Saturday, with Senate Democratic leader Chuck Schumer saying on Wednesday that his party would block a Republican spending bill.
Since January, the firm has recommended going long the euro, pound and yen — all three of which have risen sharply against the dollar in recent weeks. On Thursday, Morgan Stanley updated the targets on those trade recommendations to include:
The yen has strengthened around 6.5% versus the dollar so far in 2025, outpacing nearly all of the US currency’s major peers as investors bet on tighter monetary policy from the Bank of Japan — in sharp contrast to the easing cycles currently underway at other central banks, including the Federal Reserve.
The euro, meanwhile, rose to its highest mark versus the greenback since October this week following Germany’s historic decision to upend decades of fiscal caution in announcing plans for greater defense and infrastructure spending.
Morgan Stanley said that trader positioning in the options market is now long euro — historically a signal that the single currency has more room to extend gains.
“In recent weeks, the prospect of fiscal expansion in Germany and broader European Commission-level plans have made investment in Europe appear more attractive in relative terms,” Hornbach, Watrous and team wrote. “We therefore see additional room for the dollar to catch up to the moves in relative equity valuations.”
