Morgan Stanley remains bullish on US dollar

SYDNEY • Morgan Stanley is sticking to its bullish stance on the greenback, citing a resilient US economy and bets for rising interest rates.

The bank also expects tariff negotiations to lead to a positive outcome that will allow America's trade deficit to narrow.

Risk markets should recover as there is little reason for them to react to growth concerns at a time when the US and Chinese economies are performing well, strategists including Hans Redeker wrote in an April 5 note.

The dollar "will see the initial positive reaction to rebounding risk appetite, with US rates expectations lending support", they wrote.

The Bloomberg Dollar Spot Index has extended losses this year after declining 8.5 per cent in 2017, hurt by simmering US trade tensions and concern over America's deficits. China said it would counter US protectionism "to the end, and at any cost", after President Donald Trump ordered his administration to consider tariffs on an additional US$100 billion (S$132 billion) in Chinese goods.

While a full-blown trade escalation leading to a meaningful growth setback remains a tail risk, Morgan Stanley's base case assumes that negotiations will result in an outcome that allows the US trade deficit to narrow.

"There is too much at stake for all parties involved to allow a broad-based escalation," the bank's strategists wrote.

"The US administration appears averse to stock market volatility. Similarly, China has little interest in an escalating conflict as it requires stable global growth conditions to continue its balance sheet deleveraging strategy and rebalance its economy."

A recovery in risk markets should weaken the Japanese yen, Swiss franc and the euro, they wrote, adding that euro zone data would need to rebound for the single currency to appreciate.

An unexpected rise in US inflation is the key risk to Morgan Stanley's dollar strategy, said the report.

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A version of this article appeared in the print edition of The Straits Times on April 09, 2018, with the headline 'Morgan Stanley remains bullish on US dollar'. Print Edition | Subscribe