Morgan Stanley looks out for US dollar rebound

Morgan Stanley strategists have dropped their expectations of near-term weakening in the US dollar, though the investment bank's former economist Stephen Roach expects the greenback to drop further this year.

"It's no longer attractive to be positioned for a weaker dollar from here given the uncertainties around the fiscal policy outlook, the monetary policy outlook and the growth in inflation outlook," Matthew Hornbach, global head of macro strategy from Morgan Stanley, said in a phone call yesterday.

"We turn neutral on the USD amid rising US fiscal stimulus odds and crowded USD sentiment," Hornbach, colleague James Lord and others wrote in a note dated January 9.

Meanwhile, they said they're looking "for signals on when to turn bullish."

The Bloomberg Dollar Spot Index headed for its best three-day rally since September yesterday while 10-year Treasury yields pushed higher to levels not seen since March. The US dollar had fallen as much as 14 percent from last year's peak in the first quarter as the coronavirus wreaked havoc, with many forecasters turning more bearish on the US currency toward the end of last year.

Morgan Stanley has now exited short positions on the US dollar versus the euro and Canadian dollar.

However, Roach sees another 15-20 percent downside to the dollar index as the market is placing too much emphasis on the Federal Reserve holding rates at zero to prevent another recession. He said it was hard for the US economy to stage a V-shaped recovery and expects a larger deficit and euro strength.

The yuan is expected to rise up to 6.2 per one US dollar in the mid-year before falling to 6.4 in the end-2021 as capital may flow into other countries along with the global economic recovery, UBS said.

Meanwhile, DoubleLine Capital chief executive Jeffrey Gundlach warned that bitcoin could be getting overheated after its massive run in recent months. But some analysts saw bitcoin as relevant as long as the world is flooded with money and safe assets offer poor compensation.

He also raised concerns about the stock market's elevated valuation relative to historical levels, being supported only by stimulus and believes rising inflation could upend investors this year.

Meanwhile, Goldman Sachs wealth-management team said to buy US stocks despite US stocks are the most expensive since the dot-com bubble as they expect the S&P 500 to post a return of about 8 percent this year on earnings growth of about 26 percent, which is slightly above consensus.