The End of the U.S. Dollar’s Bull Run?

Our analysts Paul Walsh, James Lord and Marina Zavolock discuss the dollar’s decline, the strength of the euro, and the mixed impact on European equities.

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Paul Walsh: Welcome to Thoughts on the Markets. I'm Paul Walsh, Morgan Stanley's Head of European Product. And today we're discussing the weakness we've seen year-to-date in the U.S. dollar and what this means for the European stock market.

It's Tuesday, July the 15th at 3:00 PM in London.

I'm delighted to be joined by my colleagues, Marina Zavolock, Morgan Stanley's Chief European Equity Strategist, and James Lord, Morgan Stanley's Chief Global FX Strategist.

James, I'm going to start with you because I think we've got a really differentiated view here on the U.S. dollar. And I think when we started the year, the bearish view that we had as a house on the U.S. dollar, I don't think many would've agreed with, frankly. And yet here we are today, and we've seen the U.S. dollar weakness proliferating so far this year –  but actually it's more than that.

When I listen to your view and the team's view, it sounds like we've got a much more structurally bearish outlook on the U.S. dollar from here, which has got some tenure. So, I don't want to steal your thunder, but why don't you tell us, kind of frame the debate, for us around the U.S. dollar and what you're thinking.

James Lord: So, at the beginning of the year, you're right. The consensus was that, you know, the election of Donald Trump was going to deliver another period of what people have called U.S. exceptionalism.

Paul Walsh: Yeah.

James Lord: And with that it would've been outperformance of U.S. equities, outperformance of U.S. growth, continued capital inflows into the United States and outperformance of the U.S. dollar.

At the time we had a slightly different view. I mean, with the help of the economics team, we took the other side of that debate largely on the assumption that actually U.S. growth was quite likely to slow through 2025, and probably into 2026 as well – on the back of restrictions on immigration, lack of fiscal stimulus. And, increasingly as trade tariffs were going to be implemented…

Paul Walsh: Yeah. Tariffs, of course…

James Lord: That was going to be something that weighed on growth.

So that was how we set out the beginning of the year. And as the year has progressed, the story has evolved. Like some of the other things that have happened, around just the extent to which tariff uncertainty has escalated. The section 899 debate.

Paul Walsh: Yeah.

James Lord: Some of the softness in the data and just the huge amounts of uncertainty that surrounds U.S. policymaking in general has accelerated the decline in the U.S. dollar. So, we do think that this has got further to go. I mean, the targets that we set at the beginning of the year, we kind of already met them. But when we published our midyear outlook, we extended the target.

So, we may even have to go towards the bull case target of euro-dollar of 130.

Paul Walsh: Mm-hmm.

James Lord: But as the U.S. data slows and the Fed debate really kicks off where at Morgan Stanley U.S. Economics research is expecting the Fed to ultimately cut to 2.5 percent...

Paul Walsh: Yeah.

Lord: That’s really going to really weigh on the dollar as well. And this comes on the back of a 15-year bull market for the dollar.

Pa