The U.S. dollar is expected to tumble to levels last seen during the pandemic, as Morgan Stanley forecasts a continued decline driven by deepening interest rate cuts and rising strength among competing currencies.
Strategists at the investment bank say the greenback will likely fall another 9% over the next 12 months, pushing the U.S. Dollar Index down to 91, a level it hasn’t touched since early 2021.
The dollar index — a measure of the greenback’s value against a basket of six major currencies including the euro, yen, pound, Swiss franc, Canadian dollar, and Swedish krona — stood at 98.9 on Tuesday, having already breached Morgan Stanley’s earlier year-end target of 101 in April.
“We think rates and currency markets have embarked on sizeable trends that will be sustained — taking the U.S. dollar much lower and yield curves much steeper — after two years of swing trading within wide ranges,” the strategists wrote in a note published over the weekend.
Sharpest Drop Expected Against Safe Havens
Morgan Stanley believes the dollar’s losses will be most pronounced against traditional safe-haven currencies such as the euro, Japanese yen, and Swiss franc. By mid-2026, they expect the euro to reach $1.25 and the British pound to climb to $1.45, marking sharp increases from current levels.
The dollar index has already fallen more than 10% since its January peak of nearly 110, which followed speculation around the new Trump administration’s economic stance and the Federal Reserve’s projected rate trajectory. While the index briefly rebounded in February, the upward momentum stalled after the White House implemented new tariffs on select imports — reviving fears of another trade war.
Trump’s Policies Seen Dragging Growth
Beyond the Fed’s interest rate policies, Morgan Stanley sees broader policy developments under President Donald Trump as a drag on economic growth. The bank’s economists cited tariffs and immigration restrictions as twin forces weighing on U.S. output while expressing skepticism about any significant boost from fiscal spending or deregulation.
According to their outlook, U.S. GDP growth is expected to slow to 1% in 2025 and remain at that level in 2026. Those projections are even more cautious than the OECD’s latest forecast, which sees the U.S. economy expanding by 1.6% in 2025, a downgrade from its earlier estimate of 2.8%.
Rate Cuts and Yield Curves
Morgan Stanley also forecasts a yield of 4% on the 10-year Treasury by the end of 2025 but expects a steeper decline in bond yields by 2026. The bank anticipates that the Federal Reserve will slash rates by a cumulative 175 basis points starting in 2026, as growth weakens and inflation finally returns to the central bank’s 2% target.
The call for a weaker dollar coincides with a broader shift in global market sentiment, as investors begin to bet more heavily on an end to the Fed’s rate-hiking cycle and the beginning of a prolonged easing phase. In contrast, some rival central banks — particularly in Europe — are either expected to hold steady or pursue tighter policy for longer.
Implications for Global Markets
The dollar’s retreat could reshape global capital flows and ease pressure on emerging markets, which often struggle with dollar-denominated debt. A weaker dollar tends to lower the cost of borrowing abroad and boost commodity prices, particularly for oil and metals priced in the U.S. currency.
However, the long-term impact is expected to hinge on whether the Trump administration moderates its current economic course or doubles down on protectionist measures that continue to isolate the U.S. from global supply chains and labor migration.
With political uncertainty rising and global markets recalibrating to the reality of slower American growth, the dollar’s slide may prove to be more than a short-term correction — it may mark the beginning of a structural retreat in U.S. economic dominance.
