Morgan Stanley sounds the alarm on "bull trap": Market underestimates negative impact of Middle East war on economy, USD rally difficult to sustain.

Morgan Stanley stated that as the interest rate gap between the United States and Europe narrows, and economic growth is suppressed by the Middle East war, the US dollar will weaken. Since the US attack on Iran on February 28, the dollar has been strong, benefiting from safe-haven currencies and the status of the currency of the world's largest energy-producing country. Since the outbreak of the war, an index measuring the dollar exchange rate has risen by 2%, reaching its highest level since December last year on Monday. Meanwhile, the euro and the yen have fallen by over 2% during the war, as both countries rely on energy supplies from the Middle East. Strategists led by David Adams at Morgan Stanley wrote in a report on Wednesday, "The rise to this level is more likely a 'bull trap' - a false signal where price trends attract investors into the market, only to suddenly reverse." He added that the market has already absorbed the inflation risks brought about by the rise in energy prices, but still "underestimates the negative impact on economic growth." According to the latest data from the US Commodity Futures Trading Commission, traders turned bullish on the dollar for the first time this year as of the week ending March 17. The surge in energy prices has intensified inflation risks and prompted traders to digest the impact of European rate hikes - they had bet on rate cuts before the war broke out. Morgan Stanley's view is in line with that of Castle Securities. Castle Securities stated earlier this week that investors are starting to shift their focus from the initial inflation shock to its impact on global economic growth. Morgan Stanley strategists said, "The interplay between inflation and growth poses a challenge for central banks, and policy outcomes will vary as they weigh these competing forces." Morgan Stanley stated that the Federal Reserve is likely to overlook "temporary inflation shocks" and focus on growth instead. The bank predicts that the Fed will cut interest rates twice this year. In Europe, strategists expect the European Central Bank to raise rates by 50 basis points "to address inflation." Strategists said, "Rates could move in a direction unfavorable to the dollar, both in absolute terms and relative to market pricing."