By Matthew Hornbach, Morgan Stanley global head of macro strategy
Interest rate and currency markets have oscillated in wide ranges over the past two years. Since mid-2023, 10-year US Treasury yields have traversed nearly the entire range from 3.5% to 5.0% five times before settling near the middle of that range – where they sit today. When US Treasury yields rose from the lower end of the range, the US dollar appreciated. And when they fell from the upper end, the US dollar depreciated. Coming into the year, we thought both the US dollar and Treasury yields would break these ranges to the downside – leaving the currency materially weaker and yields materially lower in 2025.
At one point in early April, both calls looked on track. 10-year Treasury yields nosedived from near 5% to below 4% and the DXY index fell 10% – both from their mid-January highs. Since 'Liberation Day' on April 2, however, the US dollar has decoupled from 10-year yields. Instead of appreciating in line with Treasury yields, the US dollar has depreciated, breaking below its two-year range. While this decoupling may not last, we believe it supports our view for a much weaker US dollar ahead. Indeed, in our recent mid-year outlook, The Moments of TRUTHS, we forecast that the DXY dollar index will depreciate by another 9% over the next 12 months.
