The dollar has been on a nice rally, but the currency team at Morgan Stanley isn’t buying it.
In their latest FX Pulse, titled Greenback Attack, they basically see this as only a bounce within a larger downtrend.
As we have written about previously, there are fundamental reasons for the USD downtrend. With the US economy hitting a soft patch and the Fed firmly committed to low rates, there was (and still is) little fundamental support for the USD. But currencies are also a reflection of fundamental differences between the US and its peers. Relative to the US, the pace of the recovery has been higher abroad, particularly in EM economies. Meanwhile, inflation-targeting central banks have been more responsive to the rise in price pressures, hiking well ahead of the Fed, namely the ECB.