Morgan Stanley predicts a strengthening US dollar as falling Treasury yields indicate a risk-off trading environment. The firm notes that the US dollar typically gains in the period following the last rate hike of a cycle and, as per options pricing, investors continue to hold net short US dollar positions. Consequently, the bank recommends maintaining long USD positions against the EUR, CAD, and AUD.

In addition, Morgan Stanley believes that the market's reduced pricing for the European Central Bank's terminal rate will put pressure on the EUR. Therefore, the bank continues to recommend short EUR/USD positions, targeting 1.03.