Wall Street: "Dollar to Peak Mid-Next Year and Then Decline"

Decline in U.S. Real Interest Rates Narrows Rate Gap with Other Countries

Morgan Stanley: "Dollar to Be Lower Than Current Levels by End of Next Year"

SG Estimates "Dollar to Decline by 6% Next Year"

Major banks on Wall Street expect the value of the dollar to decline from late 2025. This outlook is based on the anticipated impact of President Trump's policies and the Federal Reserve's interest rate cuts.

According to a survey conducted by Bloomberg on the 16th (local time) with strategists from major banks such as Morgan Stanley, JP Morgan Chase, and Societe Generale, they expect the dollar to peak mid-next year and then start to decline.

Societe Generale estimates that the ICE U.S. Dollar Index will fall by up to 6% by the end of next year.

The Bloomberg Dollar Spot Index has risen about 6.3% so far this year. It has surged to its highest in nine years, fueled by strong U.S. economic data and Trump's election victory.

The dollar has particularly risen sharply since Trump's election, driven by expectations that his tariffs and tax cuts will spur inflation, making it difficult for the Fed to cut rates next year.

Based on data from the Commodity Futures Trading Commission as of December 10, Bloomberg estimates that speculative traders are maintaining long positions on the dollar worth about $24 billion, the highest level since May.

Despite this, Morgan Stanley's currency strategists Matthew Hornbach and James Lord expect the dollar to be lower than current levels by the end of next year. They cited the decline in U.S. real interest rates and improved risk appetite as factors increasing the likelihood of a weaker dollar next year.

Currency strategists commonly point out that the dollar's strength due to Trump's aggressive trade stance and tariff threats has already been priced in even before the Trump administration takes office.

Following Trump's pledge to impose a 25% tariff on Mexican and Canadian goods, the Mexican Peso and Canadian Dollar have fallen. In anticipation of a trade war, currencies like the Euro and Chinese Yuan are already showing weakness. The Euro fell to its lowest in two years in November, nearing parity after the U.S. election.

The MSCI Emerging Markets Currency Index is already trading at its lowest in four months.

Strategists like Daniel Tobon from Citigroup suggest that it remains to be seen whether a trade war will materialize as Trump literally stated in his second term. Dollar bulls are taking long positions based on the view that Trump's trade stance inherently supports the dollar.

Looking back at Trump's first term, the likelihood of a weaker dollar next year is high. After a massive rally following Trump's election in 2016, the Bloomberg Dollar Index recorded its largest annual decline the following year as the U.S. economy lost momentum.

Even the options market, which expects a stronger dollar next year, is somewhat tempering the post-Trump victory rally expectations.

Sophia Drossos, a strategist and economist at Point72 Asset Management, said most of the positive news for the dollar has already been priced in.

She noted that considering the European Central Bank and Bank of England, which are expected to cut rates less than the Fed next year, the Euro and Pound are likely to rise after next year.

Morgan Stanley's rate strategists expect U.S. Treasury yields to fall faster than those of other countries next year. This means the interest rate advantage that has favored the dollar is diminishing.

Other experts also see Trump's trade policies, if implemented, as a factor contributing to dollar weakness. Theoretically, tariffs would cause the prices of all imported goods into the U.S. to skyrocket, leading to inflation.

Barry Eichengreen, an economist at the University of California, Berkeley, said it would be "particularly negative for the U.S. auto industry." Tariffs would significantly raise the cost of imported metals as steel and aluminum prices rise.

JP Morgan analysts, led by Mira Chandan, co-head of Global FX Strategy, pointed out that "tax cuts could widen the budget deficit and increase the term premium on U.S. Treasuries." They added, "If the Fed cuts rates more than expected, the dollar's weakness could be greater than anticipated."

Guest reporter Kim Jeong-ah kja@hankyung.com