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Anyone remotely interested in broad macroeconomics – and its impact on stocks – has to be ever so slightly obsessed with the fortunes of the dollar. I’ve been reporting in this blog on the growing army of analysts, researchers, and strategists who think that the dollar is hugely overvalued. Sadly, in terms of timing at least, they’ve been dead wrong. Until now, perhaps?

I’ve been reading through the growing chorus of cynicism emerging out of investment bank Morgan Stanley. Last week, for instance, its highly rated FX strategists put out a note arguing for dollar weakness based on several, eminently sensible, ‘pillars’.

1. “USD is (very) expensive on a variety of FX valuation measures, against both EM and
   DM.
   2. US growth momentum is set to slow materially this year, with Morgan Stanley
   economists significantly below consensus on US growth.
   3. That slowing growth momentum will force the Fed to pause, with markets likely to
   extrapolate such a pause as the end to the hiking cycle.
   4. USD won’t be a defensive asset in the next downturn, as the Fed is one of the few
   central banks with material capacity to cut in a recession.”

This would suggest that 2019 might be another of those frequently suggested, lesser spotted turning points. This week we have the cross-asset team at Morgan Stanley weighing in with the argument that we have witnessed ‘peak USD’. Their core argument is that any USD weakness might be self-reinforcing, especially because of high hedging costs.

“For investors outside the US, this cost of hedging US assets back into local currency has almost never been higher. This didn’t matter in an era where US assets were outperforming, and you wanted the currency exposure. But if USD starts to weaken, then the maths suggests that investors should look at hedging. And when they look at poor FX-hedged yields, there could be a temptation to sell. Selling unhedged US assets, and reinvesting locally, would only put more downward pressure on USD. “

And what of the investment implications: “Stay USD-bearish against both DM and EM currencies (our FX strategists like short USDSEK and USDJPY in DM and short USDBRL and USDZAR in EM). … We prefer RoW equities over US equities as USD weakness catalyzes rebalancing out of the US.”