Morgan Stanley Warns ‘Second Act’ of US Dollar Losses Incoming After the American Currency Suffers Worst First-Half Since 1973

Banking giant Morgan Stanley says the US dollar’s decline is only enjoying an “intermission” before taking its next plunge.

In a new research note, Morgan Stanley highlights that the dollar finished the first half of 2025 with its biggest loss since 1973.

At time of writing, the dollar index (DXY), which pits the greenback against a basket of other major foreign currencies weighted by trade, is at 98.15, down almost 11% since the beginning of the year.

David Adams, head of G10 FX Strategy at Morgan Stanley, says a finale is yet to come for the dollar’s slide.

“We’re likely at the intermission rather than the finale… The second act for the dollar’s weakening should come over the next 12 months, as U.S. interest rates and growth converge with those of the rest of the world.”

The dollar has printed a notable rally since July, but according to Morgan Stanley’s chief global FX strategist James Lord, a combination of recent labor market weakness, tariff uncertainty and the potential for Fed Chair Jerome Powell to be replaced earlier than expected, continues to push the dollar lower.

Says Lord,

“If we see more evidence over the summer that tariffs are increasing inflation, then it’s possible the dollar will receive more support.

Yet, recent evidence of labor market weakness combined with policy uncertainty in the U.S., such as tariff negotiations and the recent debate about an early change in the Fed’s leadership, remains a source of downward pressure on the dollar.”

And according to data compiled by the bank, foreign holders of US assets have begun placing hedges on their Treasury and equity exposures, indicating an expectation of dollar depreciation.

Says Adams,

“The initial data suggest that hedging has picked up in the second quarter, but because of the size of US asset holdings and given how much it was initially unhedged, we could be talking about a significant long-term flow… We have a lot more to go from here.”

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