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Dollar Battered, Bruised, but Set to Escape Bearish Clutches

Forex40 minutes ago (Jun 07, 2021 02:48PM ET)

(C) Reuters.

By Yasin Ebrahim – The dollar has been battered, bruised and given little chance of escaping the clutches of bearish bets, but Morgan Stanley (NYSE:MS) believes the greenback’s fortunes are about to change as real yields could be on the up and up.

The U.S. dollar index, which measures the greenback against a trade-weighted basket of six major currencies, fell by 0.21% to 89.94.

“We’ve seen some modest USD weakness recently and now believe the time has come to start scaling into long USD positions,” Morgan Stanley said in a recent note.

The firm isn’t shy to admit that its somewhat controversial call on the dollar is not popular even among its own clients as “most investors remain bearish on the USD and are positioned accordingly.”

But real U.S. yields have remained shackled for far too long, and there isn’t much room left for further downside as the Federal Reserve is expected to taper bond purchases in early 2022 to curb inflation.

U.S. breakeven rates, market expectations for future inflation, point to inflation in the years ahead in the range of 2.4% to 2.6%. Investors will receive another update on inflation with consumer CPI slated for Thursday.

“It is difficult for real yields to head much lower, given where inflation breakevens are in the U.S. and the continued progress of the U.S. economy that we think will be keeping the Fed on track to taper asset purchases in early 2022,” Morgan Stanley added.

But others have suggested that even with raising rates, the greenback will struggle to advance as demand for the euro will continue to appreciate as the euro-area economy continues to recovery.

Yet, most of the upside in the euro from bets on a strong EU recovery appears to be priced into the single currency. The “euro failed to make any headway against the USD over the past two to three weeks despite the strong data and positive headlines from the region,” according to Morgan Stanley.

Dollar Battered, Bruised, but Set to Escape Bearish Clutches

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