The Dollar’s Bear Market Could Reignite as BofA Warns of Nixon Rerun & Morgan Stanley Expects More Pain Ahead

TradingKey - Amid uncertainties from Trump’s tariffs and threats to Fed independence, the U.S. Dollar Index (DXY) has fallen 10% in 2025 year-to-date. While the dollar showed signs of bottoming in the second half, Bank of America and Morgan Stanley warn that the dollar’s decline is far from over — driven by weak U.S. economic data and political interference in Fed policy.

After the release of the August nonfarm payrolls report, traders not only priced in a September rate cut with near certainty, but also raised expectations for three rate cuts by year-end, with a 50-basis-point cut in September now on the table.

In last Friday’s report:

• August nonfarm payrolls: +22,000, far below the 75,000 forecast and prior 73,000
• More alarmingly, June and July job numbers were revised down by a combined 21,000
• June jobs: Revised from +14,000 to -13,000, marking the first negative reading since 2020

This weak labor market data makes a September rate cut almost inevitable, and with looser monetary policy ahead — along with other dollar-negative risks — the recent pause in the dollar’s decline now faces renewed downward pressure.

2025 U.S. Dollar Index (DXY) Performance, Source: TradingView

Bank of America: 1970s Nixon Rerun

Michael Hartnett, Chief Investment Strategist at Bank of America, argues that the current environment closely resembles the 1970s “Nixon era”, when political pressure forced the Fed to adjust monetary policy — potentially leading to the adoption of Yield Curve Control (YCC).

Despite rising long-term bond yields driven by concerns over government deficits, Hartnett’s core view is that rates will fall sharply, not rise. He believes policymakers may resort to KPO (Keeping-Prices-Operation) policies to contain runaway government debt costs, including:

• Twist operations
• Quantitative easing
• Yield curve control
• Revaluation of gold reserves

According to BofA’s August Global Fund Manager Survey, 54% of respondents expect the Fed to implement YCC — artificially suppressing interest rates.

BofA believes that pressure on the Fed to cut rates, combined with economic data weak enough to justify easing, will push bond yields down to 4%, not up to 6%.

As a result, the bank’s “trade of the year” is to go long on U.S. Treasuries, gold, and cryptocurrencies, while shorting the U.S. dollar.

Morgan Stanley: The Dollar Bear Market Is Far From Over

Despite the dollar’s recent stabilization and U.S. stocks continuing to hit record highs, Morgan Stanley argues that this resilience is partly due to the belief that the U.S. economy is absorbing tariffs better than expected — leading some to think the dollar bear market is over.

Additionally, concerns about the impact of tariffs on European and Asian growth have reinforced this view.

However, Morgan Stanley says these arguments, while persuasive, miss the bigger picture:

“We are not convinced that the dollar’s downtrend has run its course – on the contrary, we think its decline is barely halfway through.”

Their reasoning centers on growth outlooks and policy uncertainty.

The ongoing pass-through of tariffs to consumers will keep inflation stubbornly above target, eroding real interest rates — a historic headwind for the dollar.

With expectations rising for slower U.S. GDP growth and the latest jobs report showing stalled hiring, the case for further Fed easing is strengthening. Morgan Stanley notes this will fuel another powerful force for dollar weakness: foreign investors hedging their U.S. dollar assets.

Moreover, while the Fed is lowering the bar for rate cuts, the European Central Bank is raising it, and the Bank of England has turned more hawkish. This divergence in policy direction will further support a weaker dollar.