USD Index to Drop to 94 in H1 2025 Before Year-End Recovery

Morgan Stanley forecasts the US Dollar Index (DXY) to weaken significantly from current levels around 99 to 94 during the first half of 2025, representing a potential 5% decline. The investment bank attributes this bearish outlook to anticipated slower global growth stemming from US tariff implementations, which could create a more K-shaped economic recovery pattern. The firm expects this dollar weakness to be temporary, projecting a rebound back to approximately 99 by the end of 2026. This forecast suggests major USD pairs could see substantial moves, with EUR/USD potentially rising toward 1.12-1.13 and USD/JPY declining below 145 if the projection materializes. The anticipated tariff-induced economic slowdown could prompt the Federal Reserve to adopt a more accommodative stance, further pressuring the greenback. Traders should monitor trade policy developments and their impact on global growth dynamics as key catalysts for dollar direction in 2025.