Dollar assets hedging could push euro to 1.30 — Morgan Stanley

Morgan Stanley strategists predict that the euro could rise to 1.30 per dollar as European investors seek to hedge nearly $4 trillion in US assets. The bank's analyst David Adams explains that doubts about the dollar's status as a safe-haven asset are prompting investors to protect themselves from further volatility.

The euro has risen 12% this year on expectations that hundreds of billions in defense and infrastructure spending will revive the region's economy. Unstable US policy under President Donald Trump has also increased the appeal of the bloc's single currency.

European investors hold approximately $8 trillion in US fixed-income assets and equities, about $3.6 trillion of which is unhedged, Morgan Stanley notes. The bank estimates that hedging about $400 billion over 12 months would generate a 7% return in euros.

According to Adams, investors will be more incentivized to hedge US assets after the Federal Reserve cuts interest rates. The regulator is expected to reduce borrowing costs by 25 basis points in September.