Synopsis:

Morgan Stanley maintains a bearish view on the US dollar and Treasury yields, projecting that USD weakness will intensify over the next 12 months, particularly against safe-haven currencies, while 10-year Treasury yields are expected to fall below 3.5%, entering the lower bound of their two-year range.

Key Points:

• USD Weakness Set to Deepen:
  After reaching Morgan Stanley’s year-end target of 101 for the DXY in May, the bank now expects another 9% decline, bringing the USD Index to 91 within a year.

• Sharpest Underperformance in Decades:
  The USD has had its worst YTD performance in over 20 years, bucking consensus expectations and accelerating beyond prior bearish forecasts.

• Outperformance of Safe Havens:
  USD losses are expected to be most significant vs EUR, JPY, and CHF, highlighting a safe-haven rotation as investors reassess the macro landscape.

• 10-Year Treasury Yields to Fall Below 3.5%:
  Treasury yields are forecast to break below the 3.5% threshold, marking a move toward the bottom of the two-year range, consistent with a dovish policy outlook and softening inflation expectations.

• Yield Curve in Focus:
  Morgan Stanley hints that the shape of the yield curve may offer the next directional trade opportunity, suggesting a potential steepening trend could soon emerge.

Conclusion:

Morgan Stanley expects continued USD depreciation and a drop in long-term yields as US macro data deteriorates and monetary policy turns more accommodative. Their outlook suggests a strategic shift toward long duration trades and non-USD exposures, particularly in safe-haven currencies.