Morgan Stanley: Dollar to Weaken Amid Narrowing US-Europe Rate Differentials and Iran War's Economic Impact

On March 26, Morgan Stanley stated that the US dollar is expected to weaken as the interest rate differential between the United States and Europe gradually narrows, and as the Iran war suppresses economic growth. The dollar, which has been strengthening since the joint US-Israel attack on Iran on February 28, has benefited from its safe-haven status and its position as the currency of the world's largest energy producer. The index measuring the dollar's performance against a basket of currencies has risen 2% since the conflict began, reaching its highest level since December last year on Monday. Meanwhile, both the euro and the Japanese yen have fallen by more than 2% during the conflict, as both countries are highly dependent on energy supplies from the Middle East. Morgan Stanley believes that the Federal Reserve may overlook "temporary inflation shocks" and focus on growth, anticipating two interest rate cuts this year. In Europe, strategists expect the European Central Bank to raise rates by 50 basis points "to combat inflation." They stated, "The interest rate trajectory is likely to be unfavorable for the dollar, both in absolute terms and relative to market pricing." Morgan Stanley's view aligns with that of Citadel Securities, which stated earlier this week that investors are beginning to shift their focus from the initial inflation shock to its impact on global economic growth.