G10 FX Strategy, Global Economics, and US Public Policy_ The 2017 Dollar Redux

Summary of Key Points from the Conference Call Industry and Company Overview - The conference call focuses on the US Dollar (USD) and its expected performance in 2025, drawing parallels with 2017 and 2018. The analysis is provided by Morgan Stanley Research. Core Insights and Arguments 1. USD Decline in 2017: The USD declined in 2017 due to trade policy, global growth, and European politics, with fiscal and Fed policy being less supportive than anticipated. Similar factors are expected to contribute to a decline in 2025 [1][4][68]. 2. Trade Policy: In 2025, the USD is expected to be negatively impacted by trade policy, similar to 2017. The administration is likely to use tariffs as a negotiation tactic, particularly with China, Canada, and Mexico [77][78][80]. 3. Fiscal Policy: The fiscal policy is not expected to be fully incorporated into growth expectations until a budget reconciliation bill is passed. This mirrors the situation in 2017, where deficit forecasts remained unchanged until late in the year [4][68][106]. 4. Global Growth Expectations: Global growth in 2025 is anticipated to align with expectations, contrasting with the faster-than-expected growth in 2017. This is expected to have a neutral or slightly negative impact on the USD [4][113]. 5. European Politics: Political stability in Europe is expected to improve, reducing EUR-negative risk premiums, similar to the underperformance of EU-skeptical parties in 2017 [4][69][117]. 6. Central Bank Policies: The Fed is expected to cut rates, while the ECB's policies may lead to a stronger EUR against the USD. This reflects the changes in central bank policies observed in 2017 [4][119][125]. Additional Important Insights 1. Tariff Expectations: The expectation of gradual increases in tariffs on imports from China and the Euro Area is highlighted, with a focus on the potential impact on the USD [78][99][103]. 2. Investor Sentiment: There is a significant divergence in investor expectations regarding trade policy, with many believing that tariffs will not escalate as much as previously anticipated [91][92]. 3. Deficit Forecasts: The analysis indicates that deficit expectations have widened significantly since the 2024 election, similar to the dynamics observed in 2016-2017 [108][109]. 4. Market Positioning: The USD has recently declined due to positioning by investors who expected more aggressive tariff measures than those announced [87][88]. This summary encapsulates the key points discussed in the conference call, providing a comprehensive overview of the expected trends in the USD and the influencing factors.