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Morgan Stanley strategists revised their US dollar forecast lower, saying the dollar is losing its carry advantage as global growth shows signs of optimism and macroeconomic and inflation uncertainty eases.
The group, headed by James K. Lord, now expects the US dollar index (DXY) to end the year at 98, below their previous forecast of 104. They see USD weakness more pronounced against the euro and risk-sensitive currencies. EM currencies “should gain overall” along with the weaker USD.
Total returns for most G10 currencies are expected to be positive relative to the US dollar, with the exception of the yen and sterling.
“We expect most of Asia’s currencies to rebound in 2023, with an initial charge in the first half, followed by a more moderate appreciation in the second half, due to the outperformance of the Chinese yuan (CNY) in the first half versus the second. semester,” the Morgan Stanley strategists wrote.
Asian currencies excluding Japan see an early rally led by the South Korean won, Thai baht and Indonesian rupiah.
Over the past six months, DXY has fallen 5.2% compared to Invesco CurrencyShares Euro Trust ETFs (NYSEARCA:FXE) 7.5% gain and WisdomTree Emerging Currency ETFs (NYSEARCA:CEW) 7.6% increase as seen in this graph. Consequently, the Invesco DB Dollar Index Bearish Fund (NYSERCA:UDN) rose 5.2%.
However, the World Bank sees no global optimism as it cut its global growth forecast to 1.7% in 2023 from the 3% growth it expected six months ago.
SA contributor Andrew Hecht signaled technical resistance in December as the dollar index approached the critical downside level.
