Morgan Stanley Lowers U.S. Dollar Forecasts as Federal Reserve Set to Ease

The dollar may drop to the weakest since December 2009 versus the euro as the Federal Reserve buys more assets in so-called quantitative easing to stimulate growth, Morgan Stanley said.

The U.S. currency is likely to reach $1.46 per euro by year-end and trade little changed at 81 yen, Morgan Stanley said in a note to clients, adjusting previous estimates that the greenback would be at $1.36 against the euro and 93 yen. The dollar will rally in 2011, reaching $1.32 per euro and 93 yen by year-end, the bank predicted.

“The market has become very sensitive about talk of further QE, and the ‘punish the printer’ theme has started to be a major theme in the foreign exchange market,” Stephen Hull, head of global currency strategy in London at Morgan Stanley, wrote in a note dated yesterday. “We have revised our currency forecasts with a weaker profile for the U.S. dollar over the forecast horizon.”

The dollar was at $1.3891 versus the euro as of 12:30 p.m. in Tokyo from $1.3930 in New York yesterday and fell 0.6 percent to 80.57 yen. The currency last traded at $1.46 per euro on Dec. 15, 2009.

Morgan Stanley said it wasn’t forecasting further strength in the yen and Australian dollar against the greenback given the poor risk-reward profile for investors. The U.S. dollar may decline further against the Asia-Pacific currencies in the near- term, it said.

‘Undervalued’ Greenback

The Australian currency will buy 98 U.S. cents by year-end and 85 cents by end 2011, the bank said, after trading at 97.68 cents today.

The greenback will enter the new year “extremely undervalued,” wrote Hull, who predicts it will gain to $1.43 per euro in the second quarter and $1.32 by in the final three months of 2011. Against the yen, the greenback will rise to 85 by June and 93 yen by year-end 2011, Morgan Stanley said.

“If the euro and yen strengthen significantly from here, there may be a risk that their respective economies double- dip,” Hull wrote.

To contact the reporters on this story: Candice Zachariahs in Sydney at Czachariahs2@bloomberg.net; Garfield Reynolds in Sydney at greynolds1@bloomberg.net.

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

Oct. 29 (Bloomberg) -- Sarah Hewin, a senior economist at Standard Chartered Bank Plc, talks about the outlook for the U.S. economy and quantitative easing. She speaks with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)

Oct. 28 (Bloomberg) -- John Taylor, chairman and founder of FX Concepts Inc., discusses the outlook for currency markets. Taylor, speaking with Erik Schatzker on Bloomberg Television's "InsideTrack," says another round of quantitative easing is mostly priced into the market and that the U.S. dollar will weaken through the end of November before recovering. (Source: Bloomberg)