Dollar exchange rate could fall to COVID-19 pandemic levels in 2026 - Morgan Stanley

Morgan Stanley strategists predict a further decline in the dollar - by about 9% for the year. The U.S. currency will be weakened by lower interest rates, slowing economic growth and the trade and tax policy of U.S. President Donald Trump, according to Wall Street.

The ICE U.S. Dollar Index, which tracks the dollar against a basket of foreign currencies, could fall about 9% by mid-2026 and reach COVID-19 pandemic levels, according to Morgan Stanley strategists, Bloomberg has learned from their note;

"After two years of fluctuating within wide ranges, interest rates and currency markets have entered sustained large-scale trends: the dollar will weaken markedly and the yield differential [between short- and long-term bonds] will widen sharply," the investment bank said in a survey. 

The Bloomberg Dollar Spot Index on Monday, June 2, dropped by 0.5%, continuing its decline since early April and approaching its lowest level since July 2023. The dollar weakened against all currencies of the G10 countries (Group of Ten - a group of developed countries that cooperate on international economic and financial issues) amid escalating global trade tensions, Bloomberg writes. 

The continued pessimism about the U.S. currency is evidenced by the fact that net short positions on it remain near their highest since 2023, according to Commodity Futures Trading Commission (CFTC) data as of May 27 and Bloomberg analysis. 

Morgan Stanley's forecast was another signal of decreased confidence in the dollar's prospects. Last week, JPMorgan strategists also recommended investors to bet on other currencies: the yen, euro and Australian dollar, write Bloomberg.

Morgan Stanley also considers euro and yen, as well as Swiss franc as the main beneficiaries of dollar weakening. Analysts of the bank predict growth of the euro to about $1.25 next year. The pound sterling, according to Morgan Stanley, may rise from $1.35 to $1.45, which will be facilitated by high returns on investments in the British currency and low trade risks in the UK. The yen may strengthen from the current 143 to 130 per dollar, according to strategists Morgan Stanley.

Trump's trade policy is undermining confidence in U.S. assets and forcing investors to reconsider their reliance on the dollar, Bloomberg writes. Nevertheless, as CFTC data shows, the current, "bearish" sentiment on the dollar is still far from historical highs, indicating the potential for further weakness.

Morgan Stanley also predicts that the yield on 10-year U.S. Treasury bonds will reach 4% by the end of this year, and next year - sharply reduced amid the expected reduction in the key rate of the Federal Reserve 175 basis points. On Monday, the yield rose 4 basis points to 4.44%, Bloomberg noted.

Investors are separately concerned about possible changes in US tax policy towards foreigners: individuals and corporations, according to analysts at Goldman Sachs. The bill, which the Trump administration is actively promoting in Congress, proposes, among other things, to raise taxes on passive income - such as interest and dividends - received by foreign investors who may hold trillions of dollars in U.S. assets.

"Even if the provision's application is limited, such a measure would heighten concerns about the risks of investing in the U.S. - especially at a time when investors are already paying attention to changes in correlations between different assets and looking for ways to diversify outside the U.S. market," Goldman strategists wrote, their note quoted by Bloomberg.

Goldman estimates that the dollar is now overvalued by about 15%, and therefore has the potential for further decline. The fall of the U.S. currency may be caused by the redistribution and revaluation of global assets, Goldman believes.