Recently, Morgan Stanley analysts pointed out that the US dollar has already absorbed most of the positive factors and faces more downside risks in the future. This view contradicts the current prevailing market opinion. Despite general investor optimism about the dollar, Morgan Stanley analysts believe it is now time to sell the dollar.
Analyst David Adams and his team state that investors generally expect the dollar to continue appreciating against major currencies like the euro, Australian dollar, and British pound in the foreseeable future. In its report titled "Time to Sell," Morgan Stanley mentioned, "According to our analysis and conversations with investors, the market consensus has firmly shifted with expectations that the dollar index will continue to rise in the future."
This strong bullish sentiment stems mainly from optimistic expectations for the US economic outlook and the belief that the Trump administration's tariff policies will further boost the dollar. However, Morgan Stanley analysts believe that most of the "good news" for the dollar has already been priced into the market. In other words, the dollar's strength is already "priced in," and investors' optimistic views may be excessive.
Analysts also pointed out that the market overestimates the speed, scope, and intensity of the changes in trade policies implemented by the Trump administration starting in 2025. While policy announcements may happen quickly, the actual implementation process could be slower and relatively limited, affecting the dollar's further appreciation potential.
Morgan Stanley suggests that given the downside risks to the dollar, investors should begin shorting the dollar by buying the pound against the dollar or the Australian dollar against the dollar. The pound and the Australian dollar are less affected by trade tensions, and these currencies are currently priced close to historical lows, offering some buying value.
Morgan Stanley analysts further added, "Current market sentiment towards the dollar is generally very optimistic, indicating a potential 'pain trade,' meaning the dollar could face significant downside risks." In this context, Morgan Stanley suggests a target price of 1.32 for the pound against the dollar and 0.675 for the Australian dollar against the dollar.
Furthermore, Morgan Stanley noted that most of the negative factors facing the euro have also been fully absorbed by the market, which means there is limited room for further declines in the euro.
Overall, Morgan Stanley analysts believe that the dollar's upside potential is limited, and investors should be cautious about the dollar's long-term prospects and consider adjusting their investment strategies at this time.
