US dollar headed higher, Morgan Stanley says

The US dollar was likely headed higher as a result of the easier fiscal policy which the new US administration appeared to have in mind, Morgan Stanley said. Nonetheless, the investment bank stressed that the lack of comparable historical episodes of increased government spending when unemployment was already low meant uncertainty around its possible effects was higher than would otherwise be true. “There is little precedent for where we’re likely to head, supporting the idea that 2017 has an unusually wide distribution of outcomes,” strategists Andrew Sheets, Phanikiran L Naraparaju, Serena W Tang and Wanting Low said in a research report sent to clients. In the event, the strategists said they saw some parallels with both the late 1960s and mid-1908s, explaining that low unemployment with easing policy has been “a poor combination” for corporate credit, albeit a better one for the US dollar. Looking to the latter of those two episodes, Morgan Stanley highlighted the fact that the US dollar index jumped 25% over the year to early 1985, supported by US growth, high interest rates and more inward-looking consumption on the back of protecionism.

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