Morgan Stanley's Lord Sees More Room for Euro to Fall

Global currency markets are shifting as the euro faces a "one-two punch" from both a resilient U.S. dollar and internal European economic pressures. James Lord, an FX strategist, notes that while initial dollar strength was driven by hawkish Federal Reserve expectations, the euro's decline toward 1.10 is now fueled by widening European government bond spreads and a lower terminal rate for the ECB. In Asia, the Bank of Japan’s dovish tilt and the lack of repatriation from the Government Pension Investment Fund (GPIF) support a long position on USD/JPY, potentially pushing it above 160. Meanwhile, emerging markets like Brazil demonstrate surprising resilience; a credible fiscal adjustment program following recent elections could drive the real toward 4.5 against the dollar. This trend of improving fiscal and monetary credibility across emerging markets, including South Africa and Colombia, contrasts sharply with the volatility seen in advanced economies.