Morgan Stanley anticipates the U.S. dollar will depreciate by approximately 9% by mid-2024. This prediction is based on slowing economic growth in the U.S. and expected rate cuts by the Federal Reserve.

The bank projects the euro to rise to 1.25 from its current value of around 1.13, and the British pound to ascend to 1.45 from 1.35. Additionally, Morgan Stanley forecasts the Japanese yen will strengthen to 130 from its current level of 143.

Us Ten Year Treasury Yields

The financial entity expects 10-year U.S. Treasury yields will reach 4% by the end of 2025. Afterwards, it anticipates a sharp decline as the Fed potentially cuts rates by 175 basis points next year.

Morgan Stanley aligns with other major institutions predicting a bearish outlook for the dollar. Persistent trade tensions under President Trump are influencing this perspective. Currencies such as the euro, yen, and Swiss franc, considered safe-haven alternatives, are expected to gain from the dollar’s potential decline.

Morgan Stanley’s latest projections paint a clear picture: the U.S. dollar is likely to slide steadily as the year progresses, driven by a dampening of domestic momentum and policy shifts at the Federal Reserve. With growth showing visible signs of deceleration, the Fed could respond with a marked easing cycle—a 175 basis point reduction in rates is not subtle. We’ve come to understand that expectations of this scale don’t typically emerge without underlying conviction. The firm’s currency forecasts—particularly for the euro, pound, and yen—reflect a strong belief in how relative interest rate differentials will steer capital.

By placing the euro-dollar closer to 1.25, it’s implied that funds will increasingly flow from the U.S. into the eurozone. Not because of a sudden surge in European output, but more likely due to recalibrated yield expectations. The British pound follows a similar logic, backed partly by the Bank of England’s relatively tighter stance in the medium term and some improvement in domestic data points. The yen, while often misunderstood in directional calls, benefits from lower yield volatility and the kind of risk sentiment that often surfaces when the dollar softens.

Trade Policy And Market Perception

Yields on U.S. Treasuries, projected to peak at around 4% on the 10-year note before descending again, offer a timeline to work with. If these levels materialise through late 2025 and then collapse as projected, yield-curve strategies should be re-examined accordingly. Specifically, the flattening bias we saw earlier could morph into a steeper configuration heading into the rate cut phase. The sequencing here is vital. The suggestion is not just a drop in interest rates but a compression of returns across fixed income and a probable rerating of U.S.-based asset premiums.

Interestingly, reference to trade policy points to lingering effects from the previous administration. This is not about short-term tariffs anymore. It’s about structural shifts in how market participants perceive long-term exposure to dollar-denominated assets, especially during uncertain geopolitical phases. Hedging behaviours will likely shift in tandem—not all at once, but gradually advancing as confirmation builds.

So, what are we watching? Cross-currency basis spreads will offer early hints of migratory flows. We’ve started to notice modest increases in dollar funding costs relative to the euro and sterling, suggesting incremental demand-profile adjustments. FX volatilities in G7 pairs also deserve close attention. These aren’t just residual noise—they reflect underlying recalibration of relative value.

From where we stand, this is not a rotation toward higher-beta currencies. Instead, demand appears to be coalescing around familiar refuges: the Swiss franc, the yen, the euro. Not with fury, but with consistency. Bryan’s work on capital weighting supports this idea: even small shifts in flows can show large spot effects when liquidity thins.

Timing matters. Early positioning may exhaust short-term rallies, so staggered engagement might be safer. The clearest visibility remains in implied volatility curves—where flattening behaviour and relatively cheap skew are offering windows for optionality-based entries. Not massive exposure, but controlled asymmetry.

We’ve seen these conditions before. Not identical, but similar enough to compare mechanics. The dollar’s path is rarely linear, but motivation for excess returns is plainly shifting. For now, we remain alert not just to the direction of G10 pairs, but to the conviction behind them. That’s really where momentum finds its strength—or fades.

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