Morgan Stanley research has found that when the S&P 500, U.S. Treasury yields, and the U.S. Dollar Index exhibit extreme resonance (volatility exceeding 1.25 standard deviations), it can predict the U.S. dollar’s movement over the next six months. Two key signals for shorting the dollar are as follows: The “Goldilocks” scenario (rising stock markets, falling dollar and Treasuries) has an 83% success rate, with the dollar averaging a 3.3% decline, while the British pound performs best; the “All-Up” scenario (all three rising simultaneously) has a 73% success rate, with the dollar averaging a 2.7% decline, led by the Australian dollar. Such signals have appeared multiple times in 2025, indicating that market volatility is at a historical high.
Morgan Stanley’s latest research indicates that when the S&P 500, U.S. Treasury yields, and the U.S. Dollar Index exhibit extreme ‘resonance,’ it often signals an impending reversal of the strong dollar cycle.
On October 20, according to ZF Trading Desk, Morgan Stanley stated in its latest research report that when the S&P 500 Index, the U.S. Dollar Index, and the 10-year U.S. Treasury yield show extreme ‘resonance,’ the U.S. dollar tends to follow a predictable trend pattern over the next six months.
The bank’s strategist, Molly Nickolin, and others pointed out that by analyzing trading days over the past 25 years during which the S&P 500 Index, the 10-year U.S. Treasury yield, and the U.S. Dollar Index all experienced extreme volatility (exceeding 1.25 standard deviations), they identified two clear and powerful signals indicating that the U.S. dollar would weaken within the next six months.
The bank noted that historical data shows that after the occurrence of the “Goldilocks” scenario (a stock market surge exceeding 1.25 standard deviations with simultaneous declines in the U.S. dollar and Treasury yields exceeding 1.25 standard deviations) and the “All-Up” scenario (simultaneous increases in the S&P 500 Index, the U.S. Dollar Index, and the 10-year U.S. Treasury yield exceeding 1.25 standard deviations), shorting the U.S. dollar has yielded significant returns.
Morgan Stanley emphasized that sterling performs best in the “Goldilocks” scenario, likely reflecting expectations of a soft landing; while the Australian dollar leads gains after the “All-Up” scenario, potentially signaling a waning American exceptionalism and a process of global economic catch-up.
Notably, 2025 has already seen multiple trading days meeting these signal criteria, accounting for approximately 7% of the historical total, indicating that current market volatility is at a historically high level.
“Goldilocks” Scenario: The Most Reliable Signal for Shorting the U.S. Dollar
The Morgan Stanley team defined fluctuations exceeding ±1.25 standard deviations as “extreme” movements, calculated using a 10-year rolling window. Among the eight possible combinations of the three indicators—the S&P 500, the U.S. Dollar Index, and the 10-year U.S. Treasury yield—the “Goldilocks” scenario stands out the most.
The specific characteristics of this combination are: S&P 500 Index standard deviation ≥ +1.25, US Dollar Index standard deviation ≤ -1.25, and 10-year US Treasury yield standard deviation ≤ -1.25. This combination has occurred 12 times in the past 25 years, on average leading to a 3.3% decline in the US Dollar Index within six months.
Statistical tests show that the t-statistic for this signal is -2.8, with a p-value of approximately 0.02, indicating a highly consistent causal relationship between this combination and the weakening of the US dollar. In terms of hit rate, the US dollar weakened within six months in 83% of the cases after the 12 occurrences, significantly higher than other combinations.
Morgan Stanley stated that historical data shows that going long on GBP/USD yields the best returns following the appearance of the ‘Goldilocks’ scenario.
This may be because the signal implies a ‘soft landing’ scenario — the rise in US equities reflects economic resilience, but the decline in the US dollar and Treasury yields suggests expectations of easing Fed policy, benefiting developed market currencies such as the British pound.
“All-round Rally” Scenario: The Second Most Reliable Signal for Shorting the US Dollar
The “all-round rally” scenario refers to simultaneous increases of more than 1.25 standard deviations in the S&P 500 Index, the US Dollar Index, and the 10-year US Treasury yield. This combination has occurred 26 times in the past 25 years, with a frequency approximately twice that of the ‘Goldilocks’ scenario.
Although it occurs more frequently, the reliability of this scenario is slightly lower. Data shows that, on average, the US Dollar Index falls by 2.7% within six months after the “all-round rally” scenario, with a t-statistic of -2.0 (p-value approximately 0.06), indicating moderate evidence supporting a subsequent weakening of the US dollar.
The success rate of this strategy is 73%—in 26 occurrences, the US dollar fell within the following six months in 19 instances. In terms of currency pair performance, the Australian dollar against the US dollar delivered the highest returns after the “across-the-board rally” scenario.
The research suggests that this may reflect the global economic catch-up phase following the era of “American exceptionalism”:
A simultaneous significant rise in the three indicators typically implies that the US economy and markets are performing extremely strongly. However, other regions tend to begin recovering thereafter, narrowing the gap with the US, which leads to the dollar giving back some of its gains.
Morgan Stanley stated that the Australian dollar, as a typical risk and commodity currency, often performs exceptionally well during phases of synchronized global economic recovery.
Editor /rice
