Morgan Stanley analysts led by David Adams said investors were expecting the US dollar to continue to rise against major currencies such as the euro, Australian dollar (AUD) and British pound (GBP). However, they said this bullish sentiment may already be fully priced in.
“Based on our conversations, it appears that the market sentiment is converging on USD strength in the near term,” analysts shared in a report titled “Time to Sell.”
According to discussions with investors, this optimism is mainly driven by expectations that continued positive US economic data, along with new tariffs expected to be imposed by the administration of President-elect Donald Trump, will boost the value of the USD.
However, Morgan Stanley analysts said most of the "good news" has already been reflected in the current USD price.
At the same time, Morgan Stanley also warned that investors may have "overestimated" the speed and scope of changes in trade policy by the Donald Trump administration, expected to begin on January 20, 2025.
“Most trade policy announcements are likely to be swift, but implementation could be slower and narrower in scope than many investors expect. Trade restrictions will largely focus on China,” the analysts noted.
Morgan Stanley recommends investors can bet against the USD by buying AUD or GBP.
Both the pound and the Australian dollar are currently trading near historic lows and have shown little impact from trade tensions.
The analysts set a price target of 1.32 for GBP/USD and 0.675 for AUD/USD, predicting both currencies to appreciate against the USD.
Morgan Stanley warned that excessive bullishness on the greenback could lead to a “painful trade” if the trend reverses. It also said that much of the “bad news” related to the euro has already been priced into the market, reducing the downside risk for the common currency.
Thus, according to Morgan Stanley, better opportunities lie outside the USD market, and this is the right time for investors to consider switching direction.
