Will the Dollar Fall? Morgan Stanley Warns of 2026 Currency Turbulence

Morgan Stanley’s latest currency analysis suggests significant volatility ahead for the U.S. dollar in 2026, painting a picture of a market caught between weakness and potential recovery. The investment bank forecasts that the greenback will face substantial headwinds throughout the first half of 2026, before staging a potential turnaround as the year progresses.

The First Half: Weakness on the Horizon

The central thesis revolves around a continued depreciation cycle for the dollar. Morgan Stanley projects the U.S. Dollar Index (DXY) could decline approximately 5% to reach 94 by mid-year, extending what analysts characterize as an ongoing weakening phase. This bearish outlook isn’t based on speculation—it’s grounded in expected monetary policy shifts.

The Federal Reserve is anticipated to deliver three additional rate cuts during the first half of 2026, driven by a softening labor market and moderating inflation pressures. This rate-cutting cycle will cause U.S. interest rates to gradually align with international benchmarks, creating natural downward pressure on the dollar. Even as seasonal CPI fluctuations occur, the Fed’s accommodative stance is likely to persist, sustaining the dollar’s weakness longer than conventional analysis might suggest.

During this phase, the dollar paradoxically remains an attractive funding currency for carry trades, despite higher costs compared to alternatives like the Swiss franc, Japanese yen, and euro. Traders shorting the dollar face steep financing expenses, which keeps capital flowing through dollar-denominated assets.

The Second Half: A Regime Shift

The narrative changes meaningfully in the latter half of 2026. As the Federal Reserve concludes its rate-cutting cycle, U.S. economic growth is expected to accelerate, triggering a rebound in real interest rates. Morgan Stanley labels this transition a shift toward a “carry regime”—a market environment where cross-currency dynamics become paramount.

In this new landscape, the advantage swings toward risk assets and away from the dollar. European currencies are positioned to outperform, with the Swiss franc emerging as the preferred funding currency. The CHF’s status as a safe-haven asset, combined with favorable carry trade mechanics, could make it the currency of choice for positioning.

Key Takeaway

Will the dollar fall in 2026? The answer is nuanced: yes in the first half, but with recovery potential by year-end. Success in currency markets depends on recognizing these two distinct phases and positioning accordingly—whether maintaining dollar longs as a funding source early in the year or rotating toward euros and the Swiss franc as conditions shift.