• Morgan Stanley forecasts the DXY dollar index falling to 91.00 by mid-2026 as confidence grows in sustained U.S. rate cuts.
  • The bank expects reduced safe-haven demand and investor hedging to add pressure as U.S. growth converges with other economies.
  • The DXY index is currently up 0.3% at 98.893, marking a recent increase despite the longer-term bearish outlook.

Morgan Stanley is positioning for a significant dollar decline over the coming years, with strategists pointing to shifting monetary policy dynamics and changing global growth patterns as key drivers. The bank's forecast calls for the DXY index to drop to 91.00 by mid-2026, representing a substantial depreciation from current levels.

The dollar index has shown recent strength, climbing 0.3% to 98.893 in Wednesday trading, but Morgan Stanley analysts see this as temporary. "We're approaching an inflection point where the traditional dollar support pillars are beginning to crack," said one currency strategist familiar with the bank's thinking. "The rate differential advantage that has propelled the dollar higher is starting to narrow."

Federal Reserve policy remains the central focus, with market participants increasingly confident that the U.S. central bank will implement sustained rate cuts through 2025 and 2026. This comes as inflation concerns, which have dominated client surveys throughout 2025, show signs of moderating. Morgan Stanley's wealth management division, which oversees $8.9 trillion in client assets, has noted shifting client sentiment in recent quarterly surveys.

Beyond monetary policy, the bank's analysis points to convergence between U.S. economic performance and that of other major economies. After a period of exceptional U.S. outperformance, growth differentials are expected to narrow, reducing one of the dollar's key structural supports. This could benefit U.S. exporters through improved competitiveness but may increase costs for American consumers purchasing imported goods.

Currency hedging activity is also expected to play a role. As investors grow more confident in the dollar's downward trajectory, hedging strategies could amplify the move. "We're seeing early signs of positioning shifts that could accelerate the dollar's decline once the trend becomes more established," the strategist added.

Other major investment banks are reportedly reassessing their dollar forecasts in light of changing Fed expectations, though not all have adopted such a bearish stance. Morgan Stanley's call represents one of the more aggressive projections among major financial institutions.

The bank's institutional securities division, which recently posted strong quarterly results with net revenues of $18.2 billion, has been adjusting client portfolios accordingly. Meanwhile, the wealth management arm continues to monitor inflation as the primary concern among clients, though currency expectations are increasingly influencing allocation decisions.

Correction: An earlier version of this article misstated the timing of the DXY forecast. Morgan Stanley expects the index to reach 91.00 by mid-2026, not early 2026.