【USD Trend】Morgan Stanley: Rising Dollar Could Be a "Bull Trap" as Market Underestimates Negative Impact of Iran War on US Economy; Fed Expected to Cut Rates Twice This Year

SocialAnxietyStaker · 2026-03-26T04:29:17+00:00

Morgan Stanley believes the dollar's uptrend will be difficult to sustain, as the interest rate differential between the United States and Europe will narrow, and a potential Iran war could strike a blow to the U.S. economy. It forecasts the Federal Reserve will cut rates twice this year, while the European Central Bank will raise rates by 0.5 percentage points to combat inflation pressures. The market is underestimating the impact of rising energy prices on economic growth, and stagflation risks are challenging central bank policymakers globally.

SocialAnxietyStaker

2026-03-26 04:29:17

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Since the United States and Israel launched an attack on Iran on February 28, the US dollar has continued to strengthen. However, Morgan Stanley believes that the interest rate differential between the US and Europe will narrow, and the Iran conflict could hurt the US economy, making it unlikely for the dollar’s rally to persist.

Morgan Stanley strategists led by David Adams think that the dollar reaching this level is more likely a “bull trap.” The market has already priced in inflation risks from rising energy prices but has underestimated the negative impact on economic growth. The risk of stagflation presents difficult trade-offs for central banks worldwide, and policymakers will need to make choices, leading to different policy outcomes.

European Central Bank May Raise Rates by 0.5% This Year

Morgan Stanley believes the Federal Reserve may overlook “transient inflation shocks” and focus on growth, expecting two rate cuts this year. Meanwhile, the European Central Bank is expected to raise interest rates by 0.5 percentage points to combat inflation pressures.

The strategists state:

“Whether in absolute terms or relative to market pricing, the direction of interest rates may be unfavorable for the dollar.”

Since the outbreak of the Iran conflict, the Bloomberg US Dollar Index has risen 2% and reached its highest level since December last year on Monday (23rd). At the same time, the euro and yen both declined over 2%, mainly because Europe and Japan rely on Middle Eastern energy supplies.

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