Morgan Stanley and other banks push back on strongest-dollar consensus

The U.S. dollar’s momentum is drawing pushback from parts of the currency market, with strategists at Credit Agricole, Morgan Stanley and TD Securities among those challenging the prevailing view that the greenback can keep strengthening.

Reporting on the debate, traders and analysts point to the scale of the dollar’s recent move. The Bloomberg Dollar Spot Index rose about 2% in June, its strongest month since the start of the Iran war, and it extended gains into early July. The rally has been closely tied to expectations for high, or even higher, interest rates from the Federal Reserve.

A key question is how long the market will continue to extrapolate hawkish Fed policy. One critique, voiced by Credit Agricole’s Valentin Marinov, is that the dollar looks “overbought and overvalued” and that the Fed may not be as hawkish as U.S. rates markets are pricing in. In that framework, a pause or slowdown in the dollar’s climb would matter beyond currency desks, potentially easing concerns about imported inflation elsewhere.

Some of the skepticism is aimed at the positioning behind the move. The same reporting says speculative traders’ bullish stance on the dollar has become the most extreme in about a year-and-a-half, leaving less room for additional gains from simply “being long” the currency. That backdrop is also cited as encouraging a growing group of forecasters, including Stephen Jen of Eurizon SLJ Capital, to argue investors may have already extracted most of the dollar upside from chasing rate differentials.

The Fed’s reaction function is also in focus because it is being driven by what central bank leadership is indicating. The reporting links June’s rally to a renewed emphasis on fighting inflation after new chairman Kevin Warsh reiterated the Federal Reserve’s commitment during a June 17 press conference. The market is now weighing how that emphasis will translate into concrete policy decisions.

Near-term, currency strategists say incoming U.S. data could determine whether the dollar’s trend holds. The next test identified is Thursday’s U.S. employment release, with an expectation the economy added roughly 115,000 jobs last month alongside rising wages. Such a result would be consistent enough, according to the reporting, to keep bets on Fed rate increases intact.

In Japan, the stakes are showing up in exchange-rate pressure. The yen has been described as having set a 40-year low this week against the broadly advancing dollar, raising the risk of intervention by Japanese authorities if the move accelerates. A softer dollar would, by contrast, reduce the threat of imported inflation in Japan and potentially other economies sensitive to exchange-rate moves.

Morgan Stanley’s involvement in this debate, as described in the coverage, is as part of a broader set of banks and strategists arguing against the consensus case for continued dollar strength. The post does not detail Morgan Stanley’s specific dollar call, underlying scenarios, or any target levels, focusing instead on the overall disagreement and the macro catalysts the market is watching.