Dollar’s Faltering Path Echoes 2017 Plunge, Morgan Stanley Says

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(Bloomberg) — Factors that slammed the dollar at the start of Donald Trump’s first term are threatening the US currency again in 2025, according to Morgan Stanley.

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A Bloomberg gauge of the dollar notched its worst year on record in 2017 following a post-election surge, dented by everything from US trade policy to European politics. A month into Trump’s second term, many of those catalysts are again looming over the dollar and could send the currency on a similar trajectory this year, argue Morgan Stanley strategists Andrew Watrous, Ariana Salvatore and Arunima Sinha.

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“Why did the US dollar decline in 2017? Trade policy, global growth, and European politics contributed,” they wrote in a Monday report. “We think the dollar will decline this year for a number of the same reasons it fell in 2017.” 

The dollar has whipsawed investors in recent months. The Bloomberg Dollar Spot Index rallied more than 4% between election day and the close of 2024 as investors bet that heavy tariffs under the new Trump administration would reignite inflation and drive up US bond yields. 

That rally has gone into reverse this year, with the measure down 2% after capping its worst three-week stretch since September. Bloomberg’s dollar gauge ultimately fell 8% in 2017, though the Morgan Stanley team did not say how far they expect the currency to decline this year.

Tariff policies that are less harsh than many investors had prepared for are one reason for the dollar’s weakness, according to the bank. Trump said last week he would likely impose tariffs on automobile, semiconductor and pharmaceutical imports of around 25%, with an announcement coming as soon as April 2. Trump previously threatened tariffs on Canada, Mexico and Colombia, only to pull back, raising the possibility his latest proposal is also a bargaining tool.

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A 10% duty on Chinese imports is in place, however, while 25% tariffs on steel and aluminum imports are set to go into effect on March 12.

Still, some 30% to 40% of investors surveyed by Morgan Stanley do not expect the US to impose sweeping, reciprocal tariffs and believe a slate of April deadlines is instead meant to force “geopolitical concessions.”

European politics are another potential weight on the dollar in the months ahead. One focal point is the aftermath of German elections, where the likelihood of a coalition between a Christian Democrat-led block and the Social Democrats could boost the euro, Morgan Stanley’s strategists said. 

Analysts at Bank of America are similarly focused on the euro-dollar exchange rate, which they described in a Feb. 21 note as sitting at “the FX epicentre of US foreign policy uncertainty.” 

They expect the euro to end the year at $1.10, saying that a good deal of positive news has been priced into the dollar side of the pair. The single currency recently traded around $1.0475.

Goldman Sachs strategists including Kamakshya Trivedi also see shades of 2017 in their dollar outlook. But the bank said the dollar could rebound if the US starts backing up its tariff talk with more concrete measures — a path the currency took in 2018.

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“The parallels to today are clear, and the risk of a repeat is rising,” Trivedi and team wrote of the 2017 comparison in a Feb. 21 note. “However, there are also clear parallels between today and early 2018 — when the US announced new steel and aluminum tariffs, was engaged in testy trade negotiations with Canada and Mexico and preparing to raise tariffs on China.” 

At Morgan Stanley, the strategists have recommended since January that investors hold three positions against the greenback in the spot market: 

• Long euro targeting a roughly 3% move from current levels to 1.08 (with a stop at 1.02)
• Long yen targeting a roughly 3% move from current levels to 145 (with a stop at 156)
• Long pound targeting a roughly 0.5% move from current levels to 1.27 (with a stop at 1.23)

The bank’s tepid outlook for the US currency has stood out on Wall Street since the end of last year, when many firms were predicting continued dollar strength following Trump’s victory. The median forecast across sell-side strategists for the euro by the middle of the 2025 remains $1.02, the yen 152 per dollar, and the pound $1.24, according to Bloomberg data.

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