Morgan Stanley: If the Fed cuts interest rates, the yen may appreciate by nearly 10% in the coming months.

Jin10 reported that strategists at Morgan Stanley stated that if the Fed continues to cut interest rates amid increasing signs of a slowdown in the U.S. economy, the yen is expected to appreciate nearly 10% against the dollar in the coming months. Strategists, including Matthew Hornbach, wrote that the USD/JPY has currently deviated from its fair value, and if this relationship returns, the USD/JPY exchange rate will fall in the first quarter of 2026 as the decline in U.S. Treasury yields may depress fair value. They noted, “Meanwhile, Japan's fiscal policy is not particularly expansionary,” and predicted that as the U.S. economy recovers in the second half of next year and demand for carry trades rises, the yen will again face downward pressure. Morgan Stanley expects the USD/JPY to fall to around 140 in the first quarter of 2026 and then rebound to around 147 by the end of the year. (Jin10)