Despite growing optimism for the U.S. dollar, major financial institutions, including Morgan Stanley, are maintaining a bearish stance on the greenback. These banks predict that the dollar's recent rally will be short-lived, with the euro expected to strengthen against it. This contrarian view is largely based on the expectation that the Federal Reserve will begin cutting interest rates in 2027, which would reduce the attractiveness of dollar-denominated assets and narrow the interest rate differential between the U.S. and other major economies.
Several analysts are adjusting their forecasts to reflect a stronger euro. Citibank's head of G10 FX strategy, Dan Tobon, noted a high chance that the euro could fall to as low as $1.11 in the coming months, which is more than 4% below the poll median. However, other forecasts project the euro to rise to $1.16 by the end of September, $1.17 by year-end, and $1.18 a year from now. This suggests a gradual recovery for the euro despite short-term fluctuations.
The consensus among strategists, as highlighted in a Reuters poll, is that the dollar's recent rebound will fade. Factors contributing to this outlook include cooling oil prices, which temper inflation fears, and a potential reduction in Federal Reserve rate hike bets. While a strong majority of 71% of respondents expect net-long dollar positions to hold or increase by month-end, a growing camp predicts smaller declines or even gains for the dollar in the near term, indicating a divided market sentiment. The yen is also expected to strengthen, with projections of 159/$ by end-September, 156/$ by year-end, and 154/$ in a year.
