Morgan Stanley Sees Dollar Falling 9% on Slowing US Growth Bets

The Japanese currency jumped as much as 1% Monday to trade at 142.54 per US dollar. The Australian dollar rose 1% as well.

Morgan Stanley also said in a note that the 10-year US Treasury yield will reach 4% by the end of this year, and stage a much larger decline next year as the Federal Reserve delivers 175 basis points of interest-rate cuts.

“Headwinds for the dollar could come in the form of further bond market weakness, an escalation in the trade war, softer US data,” said Skylar Montgomery Koning, a currency strategist at Barclays Plc.

Investors are looking to a slew of US labor-market indicators this week, including the May employment report, for help in determining the next shifts in Fed policy and its implications for the dollar. They will also closely follow any developments on trade negotiations after China and the US accused each other of violating a deal concluded last month.

Diminishing US growth exceptionalism, uneven policy implementation by the US administration, persistent portfolio outflows are pressuring the dollar in near term, according to Paresh Upadhyaya at Pioneer Investments, who expects the Bloomberg dollar gauge to depreciate 10% during the next 12 months.

Tax Risk

For Goldman Sachs, investors are particularly focused on a potential change to US tax rates on foreign individuals and companies. The measure is buried deep in the tax-and-spending bill that Trump is muscling through Congress, and it calls for, among other things, higher taxes on passive income — such as interest and dividends — earned by investors who are potentially sitting on trillions in American assets.

“Even if the application is relatively narrow, such a tool would exacerbate concerns about risks of US investments, at a time when investors are already looking at shifting cross-asset correlations as a reason to seek greater diversification away from US assets,” strategists including Kamakshya Trivedi and Michael Cahill wrote in a note.

In a separate report, Goldman Sachs strategists said their models suggest the dollar is about 15% overvalued and therefore it has further to fall. The decline will likely be driven by reallocation and repricing of global assets, they added.

--With assistance from Masaki Kondo and Jiyeun Lee.

(Updates prices throughout.)