Morgan Stanley turns bullish on the US dollar, expects the euro to weaken against the dollar

⑴ Morgan Stanley has changed its previous assessment and turned bullish on the US dollar, expecting that rising US interest rates and robust economic growth will push the dollar to rise about 3% against the euro by mid-2027. ⑵ The foreign exchange strategy team led by David Adams acknowledged in a report that its previous forecast of continued US dollar weakness in the second half of 2026 was incorrect. ⑶ The team believes that a widening yield differential between the US and the rest of the world, strong US economic growth, and rising European risk premiums will collectively support ongoing US dollar strength through the end of the year and into 2027. ⑷ Morgan Stanley expects the EUR/USD exchange rate to fall to 1.10 by mid-next year, down from a previous forecast of 1.16, and has lowered its year-end euro forecast from 1.20 to 1.12. ⑸ However, the bank remains tactically neutral on the US dollar, citing the risk of policy-driven increases in negative risk premiums for the dollar, which may make the euro and Japanese yen safer funding currencies for carry trades. ⑹ Going forward, attention should be paid to the US interest rate path, changes in European risk premiums, and the impact of policy uncertainty on the US dollar's safe-haven status.