'This risk cannot be underestimated': Morgan Stanley warns of euro rise to $1.3
Long-term European investors are looking for ways to protect their assets from dollar volatility, analysts say
The euro rally is about to get a new impetus, Morgan Stanley strategists believe, as European investors seek to protect nearly $4 trillion in assets placed in the United States. The investment bank warns that a rise in the euro's price above $1.3 is a risk that cannot be underestimated amid growing doubts about the dollar's status as a safe haven asset.
Details
The Morgan Stanley team led by David Adams, which has one of the most bullish positions on the euro on Wall Street, believes that a rise in the euro above $1.3 is "a risk that should not be underestimated." Such a forecast exceeds even the bank's official target of $1.27 by the end of next year, Bloomberg notes.
Morgan Stanley estimates that Europeans hold about $8 trillion in U.S. stocks and bonds, of which about $3.6 trillion remains unhedged against currency fluctuations. Even a small increase in the proportion of hedged assets could "have a powerful effect," Adams says.
Hedging is a strategy of insurance against financial risks, in which an investor opens additional transactions to compensate for possible losses from the main investment. The bank expects hedging flows to total about $400 billion over the 12 months, which would give the euro a rise of about 7%. Adams said investors will have more incentive to insure dollar assets, as the cost of such protection will fall once the Fed starts cutting rates. Traders now estimate a 56% chance the Fed will resume easing in September.
Context
Since the beginning of the year, the euro has risen by 12% amid expectations. It was supported by expectations of multibillion-dollar budget injections into defense and infrastructure, and additional attractiveness was given by Donald Trump's inconsistent economic policy, Bloomberg notes.
Morgan Stanley joined Deutsche Bank, BNP Paribas and Barclays in its forecast for further euro growth. All three investment banks believe that the biggest shift in U.S. trade policy in a century and the most significant reassessment of the country's geopolitical leadership since World War II will lead to a weaker dollar. At the same time, long-term European investors, including life insurers and pension funds, are already looking for ways to protect their assets from the volatility of the U.S. currency, analysts confirm.
This article was AI-translated and verified by a human editor
