'King dollar' lacks challengers as economy stays strong, says Morgan Stanley's James Lord

King dollar lacks challengers. That’s what Morgan Stanley is saying, expecting the US dollar resilience to endure despite ongoing challenges from an increasingly multi polar world, they say. With us on the call is Morgan Stanley’s global head of FX and emerging market strategy, James Lord. So the the report looks at sort of challengers to the US dollar as the reserve currency. What about challengers to the US dollar right now with the Fed sort of lagging in the race to cut rates? Yeah, well, I mean, clearly the dollar’s been very strong so far this year. And a lot of that is to do with the the, the repricing of, of, of US interest rates. Morgan Stanley US economics team just raised up their terminal rate forecast for for U.S. dollar. And I think that’s just that’s part and part of part and part of what we’ve seen in the market this year. I mean from here actually our Fed forecasts are more dovish than what the markets pricing. We are still expecting to see three rate cuts this year. I think the markets more like 1 1/2 of this year. So on the basis of that alone, you might you might see the dollar come under a little bit of pressure. The reason why we’re not bearish on the dollar though is really just because of the growth performance of the US economy. I do think that the very strong productivity dynamic in the US economy, the supply side boost that we’re seeing in terms of immigration flows is really boosting GDP in the United States relative to other other economies around the world. And even if we do do see the Fed cutting rates this year, the returns that you’re getting from, from the US from a growth perspective just really surpassed that that you see elsewhere and the rest of the world. So I think I think for us like we, we still like the dollar. We prefer it mostly against the low yielders. We we’ve been short euro dollar expecting to see rate divergent for example, that’s been coming through. We like it versus CNH for example as well on, on the other hand, it carry currencies. We, we do think that that will come back as a theme. So we’re not we’re not recommending long dollar versus a lot of EMS that have higher carry for for example. I mean, I think one way to link the the near term action that you’re talking about right now, strong dollar with the resilience as AUS reserve currency is talking about the US fiscal position and this increasing focus on bond auctions and bond buyers and foreign buyers like China reducing exposure to treasuries. We’re going to get this, you know, refunding announcement in the in the coming weeks about just how much the US government is going to have to borrow. But at some point does that call into question dollar strength? Yeah. I mean, I it’s, it’s this is one of the things that we look at a bit in the report that, you know, one of the challenges facing the dollar’s status as as a as, as the world’s pre eminent safe haven asset is, is the fiscal position. And the the IMF highlighted this last week in its fiscal monitor. Our own economics department have flagged the risks around US fiscal health in in a note that they published last week as well. You know, but so far, like, you know, a lot of the concern has been dominated around in in the US Treasury market so far when as we’ve seen US fiscal deficit expand, that has been that has gone part in part hand in hand with with dollar strength actually. So I think if, if, if the, if the steepening of the US curve in the moments that we’ve seen concern about, about the auctions were really driven by a concern about the dollar status as a reserve asset. Like we should have seen the dollar weakened during those periods. But actually we’ve just seen dollar the dollar strengthen. Is there a point at which it could flip and you start to see a little bit more concern around the currency itself? Yeah, I mean every, everything, everything will have, has, has a, has a point at which that that might, that might that might take place. We just think that that is quite far off into the future, not least because the US is not the only country in the world in, in terms of reserve currencies that have got fiscal challenges. I mean in, in, in many countries in the eurozone. Do we, we, we think China also has, has a, has a problematic debt to GDP outlook. So on a relative basis, and this is really one of the key points of the report that on a relative basis the dollar still looks still looks like in a good position.