- Morgan Stanley maintains its core “dollar smile” strategy, despite recent forecasts of U.S. dollar weakness and global de-dollarization concerns.
- Analysts expect an 11% decline in the U.S. dollar for the first half of 2025, the largest in over 50 years, mainly due to anticipated policy changes and rate cuts.
- The “dollar smile” theory suggests the dollar performs strongly during global market stress or when U.S. growth outpaces others.
- Recent crises, including the Israel-Iran geopolitical surge in June 2025, have reinforced the dollar’s role as a safe haven.
- Morgan Stanley points to policy uncertainty—not fundamental weaknesses—as the primary reason for the current softness in the U.S. dollar.
Morgan Stanley has reaffirmed its commitment to the “dollar smile” theory, stating that temporary U.S. dollar weakness does not mean its outlook has changed. The investment bank responded to forecasts of a weaker dollar in 2025 and broader worries about de-dollarization, insisting that its framework still guides its market strategy.
According to Morgan Stanley, the U.S. dollar declined by 11% in the first half of 2025. This marks the biggest drop in the currency in more than five decades. The analysts attribute this move to expectations for U.S. Federal Reserve rate cuts and ongoing policy uncertainty, not a permanent decline in the dollar’s influence.
The “dollar smile” framework, developed in 2001, outlines how the dollar strengthens during two scenarios: periods of global market stress and times when U.S. economic growth beats international peers. In contrast, the dollar usually weakens during synchronized global growth. “We disagree with those challenges to the dollar smile framework,” said Andrew Watrous, G10 FX Market Strategist at Morgan Stanley.
Recent market events have offered evidence for the theory. During the June 2025 Israel-Iran tensions, the dollar surged, reflecting investor demand for safety. Similarly, the bank noted that policy unpredictability in the U.S. this spring led to a reduction in investor exposure to U.S. assets, causing temporary currency weakness that did not break the “smile” framework.
The theory’s performance has been measured using Economic Surprise Indices, with data showing the dollar typically rising when economic growth in both the U.S. and abroad falls below expectations. When U.S. growth outpaces global rates, monthly gains have averaged over 1%.
Events from 2018–2019, such as trade disputes, also boosted the dollar during periods of turbulence, supporting Morgan Stanley’s view that de-dollarization concerns have not become structural changes in markets. The theory continues to address multiple types of market stress.
“When markets wobble, remember this: the dollar will probably greet volatility with a smile,” Watrous said. The bank stresses that temporary declines are due to shifting policies rather than risks to the dollar’s foundational role in global finance. For more details, see Morgan Stanley’s official commentary and Andrew Watrous’s profile.
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