Markets & Economy
The dollar’s long reign of strength may be entering a more complicated chapter. According to Morgan Stanley, the greenback is headed for a volatile stretch, with further depreciation likely through mid-2026 before a recovery takes hold later in the year. The U.S. dollar index, now hovering around 100, could slide to 94 by the second quarter of 2026—its weakest level since 2021—before climbing back toward 100 by year-end, a round trip that underscores how tightly the currency’s fortunes are tied to U.S. growth and Federal Reserve policy.
The near-term pressure reflects a slowing U.S. economy and an easing cycle at the Fed. Morgan Stanley expects growth to soften in the first half of 2026 before rebounding to about 1.8% by year-end, while inflation, measured by core PCE, cools to roughly 2.6%. That backdrop gives the central bank room to keep cutting rates, potentially taking them down to the 3%–3.5% range by mid-year. Labor-market uncertainty and investor scrutiny of changes to the Federal Open Market Committee add to the headwinds, reinforcing a bearish bias for the dollar in the medium term.
Yet this is not the clean break from dollar dominance that many had anticipated. Morgan Stanley has already softened its earlier call for a prolonged bear market, noting that recent developments have challenged the idea of a sustained slide. The Fed’s October meeting, analysts say, reinforced the view that U.S. rates are unlikely to fall as far or as fast as once expected. A calmer global backdrop—marked by easing inflation and fewer trade frictions—could also lend the currency support. “A favorable global environment will likely underpin the dollar,” says David Adams, Morgan Stanley’s head of G10 FX strategy.
By the second half of 2026, the bank sees conditions aligning for a rebound. Optimism about U.S. growth is rising, helped by fiscal stimulus and the delayed impact of earlier rate cuts. If growth firms and the Fed brings its easing cycle to a close, U.S. yields could move higher again, strengthening the dollar and discouraging the carry trades that have benefited from its weakness. At the same time, corporates and investors may grow more confident in the currency and scale back hedges against depreciation, removing another source of downward pressure.
Beyond the dollar, the broader economic picture remains one of moderate but resilient growth. Morgan Stanley expects global GDP to expand around 3% in 2025 and just over 3% in 2026, supported by steady consumption and continued capital spending, particularly on artificial intelligence. Inflation is cooling across major economies, giving policymakers in the U.S., Europe and the U.K. room to ease. The range of outcomes remains wide—from upside surprises driven by AI productivity gains to the risk of a mild downturn—but strong household balance sheets and rising wealth are keeping U.S. consumers spending, while businesses continue to invest.
“The U.S. remains the most likely economy to drive material upside to global growth,” says Seth Carpenter, Morgan Stanley’s chief global economist. For investors, that makes the dollar’s next act less a story of collapse than of recalibration—choppy in the months ahead, weaker before stronger, and still central to the global financial system as 2026 unfolds.
