Is the US dollar peaking or just taking a breather? Major banks hold divergent views

⑴ The next move of the US dollar splits opinions among major banks: Deutsche Bank believes the rally is nearing its end, while Morgan Stanley sees any pullback as a buying opportunity. ⑵ Deutsche Bank's G10 spot team says the dollar appears to be close to its peak before year-end, noting that the dollar failed to advance further despite last week's strong jobs data, indicating that excessive positioning is a constraint. ⑶ The bank expects EUR/USD to approach the 1.13 to 1.14 range, and maintains a bullish outlook below 1.11. ⑷ Morgan Stanley strategists have a different view, expecting any decline in the dollar index to be tactical, as lower oil prices and interest rates prompt bullish investors to cut positions. ⑸ The bank believes fundamentals still point to a stronger dollar, with residual seasonality in US inflation and higher political risk premiums in Europe supporting the greenback through the first quarter of 2027. ⑹ Morgan Stanley says that if a position squeeze pushes EUR/USD up to 1.1350, it will sell the pair and turn bullish on the dollar index at that level. ⑺ Both views intersect in the same area: Deutsche Bank's 1.13 to 1.14 range covers Morgan Stanley's 1.1350 sell level, which one side sees as a target, and the other as a reversal point. ⑻ On the yen, the two banks also diverge: Morgan Stanley maintains a long USD/JPY position, while Deutsche Bank sells rallies around 158.50 to 158.60, expecting exporter selling pressure to emerge. ⑼ Citigroup likewise expects USD/JPY to head lower, citing limited technical upside, further unwinding of FX hedges, and a change in the Bank of Japan's stance. ⑽ Both banks agree on GBP: Morgan Stanley is short GBP/USD, and Deutsche Bank sees 1.35 as an attractive selling level. ⑾ Morgan Stanley expects the "carry trade" pattern to continue, favoring long risk-sensitive currencies funded by euros and yen, and maintains a short EUR/AUD position. ⑿ The US CPI report on Tuesday is the next test, with markets pricing in an 80% probability that the Federal Reserve will raise rates by at least 25 basis points next month.