Summary of Key Points from the Conference Call Industry and Company Involved - **Industry**: Foreign Exchange (FX) Market - **Company**: Morgan Stanley & Co. International plc Core Insights and Arguments 1. **Risk Premium Dynamics**: The risk premium has been the primary factor influencing the USD's movements post-Liberation Day, currently estimated to be around 6-8%, having halved from its peak. There is potential for it to rise again, leading to a weaker USD [1][7][34] 2. **Rate Differentials**: While rate differentials remain relevant, they have not changed significantly. The DXY risk premium is currently at 6%, with EUR/USD showing an even higher risk premium of 8% [7][34] 3. **Future Expectations**: There is a belief that the risk premium could exceed previous highs due to ongoing policy uncertainty and FX-hedging flows, which investors may be underestimating [7][34] 4. **Trade Recommendations**: The company recommends maintaining long positions in EUR/USD and short positions in USD/JPY, with specific targets and stop-loss levels provided [10][12] 5. **FX Hedging Impact**: Increased FX hedging, particularly from European investors, is expected to influence the currency dynamics significantly. The hedge ratio on US assets is projected to rise, which could further affect the USD negatively [30][31][34] Additional Important Insights 1. **Convexity in USD Weakening**: The relationship between USD and rate differentials may exhibit a convexity that markets have not fully appreciated, suggesting that lower US rates could lead to a more pronounced weakening of the USD [35][36] 2. **Historical Context**: The analysis indicates that without considering risk premium, EUR/USD should be trading around 1.07, highlighting the significant role of risk premium in current valuations [23] 3. **Market Sentiment**: The report suggests that market expectations regarding trade deals and USD positioning have influenced the risk premium, which saw a reduction in late July [27][29] 4. **Long-term Outlook**: Elevated volatility and uncertainty regarding US trade, fiscal, and monetary policies are seen as catalysts for potential increases in risk premium, which could further weaken the USD [34] This summary encapsulates the critical insights from the conference call, focusing on the dynamics of the USD in the FX market, the role of risk premium, and strategic recommendations for investors.