New Delhi [India] November 27 (ANI): The U.S. dollar could weaken further before staging a recovery next year, according to Morgan Stanley's 2026 Investment Strategy Outlook.

'The U.S. dollar is likely to be on a choppy path over the next 12 months, with continued weakening in the coming months followed by a recovery and an end to the dollar's bear market in the second half of 2026,' noted Morgan Stanley.

The report says the U.S. dollar index, currently around 100, may fall to 94 in the second quarter of 2026, its lowest level since 2021, before climbing back to 100 by the end of the year. The trajectory hinges on U.S. growth, unemployment and interest rates.

'The U.S. dollar index, currently around 100, could fall to 94 in the second quarter of 2026 and rise back to 100 by the end of the year,' noted Morgan Stanley's outlook.

Morgan Stanley notes this marks an upgrade from its earlier view that the dollar could lose as much as 10% from mid-2026 through the end of 2026.

'The dollar's performance is tied to the outlook for U.S. growth and Fed interest rates,' adds the outlook.

David Adams, Head of G10 FX Strategy, says the 'October Federal Reserve meeting reinforced a perception that U.S. rates are unlikely to decline as much or as quickly as previously anticipated,' adding that easing inflation and cooling trade tensions 'will also likely support the dollar.'

The bank's 2026 Economic Outlook expects U.S. growth to slow early next year before rising to '1.8% by year-end,' while inflation (Core PCE) may ease to '2.6% from 2.9%.' With the Fed seen cutting rates to '3%-3.25% by June,' analysts maintain a bearish view for the medium term, citing 'labor market uncertainty' and upcoming 'FOMC composition' changes.

However, Morgan Stanley outlines three drivers for a late-2026 rebound: a resilient growth outlook supported by the 'One Big Beautiful Bill,' a 'rebound in U.S. rates' as cuts end, and a shift in corporate and investor hedging behaviour as confidence in the dollar improves. (ANI)