US dollar depreciation has reached two-year lows this week, and Morgan Stanley is warning that bearish pressure isn’t done yet. The investment bank forecasts continued weakness driven by expected Federal Reserve rate cuts, diminishing safe-haven status, and also mounting forex market volatility that threatens to extend the currency’s decline further.

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Understanding US Dollar Depreciation Amid Fed Cuts And Market Volatility

Morgan Stanley Warns US Dollar Depreciation Will Continue

Right now, Morgan Stanley’s strategists are forecasting that US dollar depreciation will persist throughout 2025. Their USD forecast points to both fundamental and also technical factors working against the greenback.

Morgan Stanley strategists stated:

“We forecast that the US dollar (USD) will continue its year-to-date depreciation, driven by both fundamental and technical factors. Fundamentally, a convergence in US growth and interest rates weighs on USD, while increased FX hedging and continued debates around USD’s safe-haven status increase USD’s discount to fair value.”

Morgan Stanley’s USD forecast is particularly striking because some investors were betting on a dollar rebound. But the bank’s analysis shows that US dollar depreciation pressures aren’t going away anytime soon.

Federal Reserve Rate Cuts Drive Currency Weakness

Federal Reserve rate cuts speculation got a boost Tuesday when Chairman Jerome Powell didn’t rule out a July rate cut. His comments led to increased bets on earlier policy easing, which is weighing on the dollar right now and contributing to ongoing US dollar depreciation.

At the time of writing, following Powell‘s remarks, traders increased their July rate cut bets from 20% to 23%. The Federal Reserve rate cuts expectations are creating uncertainty in currency markets, and when rates fall, it typically makes the dollar less attractive to investors.

Dollar Safe-Haven Status Faces Fresh Scrutiny

The dollar’s safe-haven status that investors have relied on for decades is being questioned. Traditional risk-off flows that used to benefit the dollar aren’t materializing the way they used to, and this represents a significant shift affecting US dollar’s depreciation trends.

Morgan Stanley’s analysts point out that even after this year’s drop, dip buyers aren’t likely to emerge. The dollar’s safe-haven status erosion is happening at a time when the real broad USD index remains about 15% above its long-run average.

Morgan Stanley strategists stated:

“Citing the extent of year-to-date declines as a reason for hitting pause on USD shorts isn’t a persuasive argument considering the longer-run historical context.”

Forex Market Volatility Amplifies Dollar Decline

Forex market volatility is being amplified by technical factors working against the dollar. As global investors increase hedging of US assets, this creates additional downward pressure on the greenback and also contributes to ongoing US dollar depreciation.

Morgan Stanley’s USD forecast expects hedge ratios for US-held assets to climb, particularly European holdings of US equities. This forex market volatility is creating a feedback loop that’s putting more pressure on the currency.

Morgan Stanley strategists said:

“The more consistent and persistent this positive correlation [between USD and US equities], the greater the incentive to hedge.”

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The combination of anticipated Federal Reserve rate cuts, questioned dollar safe-haven status, and also increased forex market volatility is creating conditions for continued US dollar depreciation. Morgan Stanley believes this bearish momentum will persist, with the dollar’s slide having further to run.