Morgan Stanley Declares De-Dollarization Dead—Dollar’s Smile Widens in 2025

De-Dollarization? More like Dollar Domination.

Morgan Stanley's latest analysis hits like a wrecking ball—global efforts to dethrone the greenback have flatlined. The USD isn't just holding strong; it's flexing.

Why the Dollar Still Rules

No rival currency comes close. Not the euro, not the yuan, and definitely not a basket of mixed alternatives. Reserve currencies demand depth, stability, and trust—traits in short supply outside the U.S. system.

Geopolitical Winds Can't Sink This Ship

Even as nations squawk about reducing dollar reliance, action lags far behind rhetoric. Trade networks, debt markets, and Swift pipelines remain dollar-drenched. Kicking the habit? Easier said than done.

Crypto’s Role—Not the Savior Yet

Digital assets nibble at the edges but hardly dent dollar hegemony. Bitcoin? A speculative haven, not a payment standard. Stablecoins? Still mostly backed by… you guessed it: dollars.

So here we are—another year, another report confirming what cynics already knew: everyone loves to hate the dollar until they need to borrow, buy, or bail out. The king isn't dead. It isn't even sick.

Morgan Stanley Dollar Outlook Amid De-Dollarization And Market Risks

The Dollar Smile Theory Validates Morgan Stanley Dollar Still Smiling Position

The dollar smile framework was developed by Morgan Stanley back in 2001, and it explains how the currency behaves under different global growth scenarios. The theory shows the dollar rising during global growth scares on the left side, weakening during synchronized global growth in the middle, along with strengthening when US growth outperforms on the right side.

The analysis using Economic Surprise Indices demonstrates that Morgan Stanley’s dollar still smiling theory actually works. When both US and international growth disappoint expectations, the dollar rises 0.8% monthly on average over 20 years. When US growth outperforms while international growth underperforms, dollar gains reach 1.1% monthly.

Andrew Watrous, G10 FX Market Strategist at Morgan Stanley, stated:

Recent Episodes Support Morgan Stanley De-dollarization Failure Claims

Recent market events validate that Morgan Stanley’s initial de-dollarization predictions have failed to materialize at the time of writing. During 2018-2019 trade tensions, the dollar strengthened despite US-driven global concerns. The June 2025 Israel-Iran geopolitical spike also triggered dollar strength, which was quite significant.

Some investors have argued that the left side of the smile might be broken, but Watrous shared his thoughts on recent performance:

The April 2025 tariff episode provides additional evidence. The Morgan Stanley US dollar decline forecast showed temporary weakness from policy uncertainty rather than growth concerns breaking the smile framework, even though some expected otherwise.

Watrous stated:

Dollar Weakness Doesn’t Break Morgan Stanley Dollar Still Smiling Framework

The Morgan Stanley US dollar decline forecast acknowledges recent weakness while maintaining the core framework remains intact right now. The 11% first-half 2025 decline marked the biggest drop in 50+ years, ending a 15-year bull cycle that many thought WOULD continue.

Expected Fed rate cuts and policy uncertainty through 2026 have driven this decline. However, Morgan Stanley’s de-dollarization theories haven’t materialized as structural changes, which is important. The final Morgan Stanley US dollar outlook shows temporary weakness rather than fundamental framework breakdown, even with all the current market volatility.

At the time of writing, Morgan Stanley’s strategists continue to emphasize that their smile framework accounts for different market stress types. The recent performance was actually reflecting policy uncertainty rather than growth-driven SAFE haven flows.

Watrous concluded:

This reinforces that Morgan Stanley’s dollar still smiling theory accounts for different market stress types, with recent performance reflecting policy uncertainty rather than growth-driven safe haven flows that define the traditional framework.