Morgan Stanley expects the U.S. dollar to weaken through the first half of 2026 before stabilising later in the year, according to its latest year-ahead FX outlook. The bank forecasts the DXY dollar index to drop from around 99.45 today to 94.00 by mid-2026, reflecting a period of elevated risk premium tied to concerns over U.S. labour-market softness and uncertainty surrounding the Federal Reserve’s rate-cut trajectory.
Strategists say that as clarity around growth and policy improves in the second half of 2026, that risk premium should unwind, allowing the DXY to recover to 99.00 by year-end. With that expected pattern of weakness followed by normalisation, Morgan Stanley has dropped its recommendation that investors hedge U.S. assets against a falling dollar.
The bank concludes that the dollar is unlikely to meaningfully distort global portfolio returns next year: it won’t be a major tailwind for U.S.-based investors, but it also won’t be a significant drag.
This article was written by Eamonn Sheridan at investinglive.com.