Dollar Potential to Fall if Risk Appetite Improves
The US dollar has the potential to weaken in the coming months if risk appetite improves, according to a strategic note from Morgan Stanley. They believe the equity rally, supported by US earnings, is opening up room for risk-on sentiment to weigh on the dollar, with the DXY index currently trading flat at around 97.903.
However, this weakening scenario depends on a relatively "just right" US data path: not so weak as to trigger downward revisions to corporate earnings projections, but also not so strong as to revive discussions about a Fed interest rate hike. This means that the dollar's direction is considered sensitive to a combination of macro data that influence policy expectations and earnings prospects.
Beyond risk sentiment, Morgan Stanley believes the dollar could gain support from a narrowing interest rate differential between the Fed and the European Central Bank (ECB), which typically influences capital flows and major currency positions. If this differential narrows without sharply altering the growth narrative, support for the dollar could prevent further declines.
Morgan Stanley stated its projection for the DXY is heading towards 95,000, but emphasized that the key monitoring variables remain the quality of upcoming US data and its implications for two key channels: earnings expectation revisions and the repricing of the Fed's interest rate path.
Source: Newsmaker.id
