Morgan Stanley said the dollar will suffer more losses as thegreenback fell for a second day after the Federal Reserve refrainedfrom tightening policy and lowered its long-term path for interestrates.

The U.S. currency weakened versus most of it major peers, pushingits drop this year beyond 4 percent, as traders digested the Fedannouncement and the Bank of Japan's move to shift the focus of itsstimulus to controlling interest rates. An index of 20emerging-market currencies gained for a fourth straight day.

“The U.S. dollar decline has more weeks to go, we think abouttwo months,” Hans Redeker, Morgan Stanley's chief global currencystrategist in London, said in an interview with BloombergTelevision. “We suggest that the U.S. dollar will extend itsdecline, index-wise, between 4 percent to 5 percent.”

The Fed's announcement further dims the outlook for thedollar after a 20 percent surge since the middle of 2014 gave wayto weakness this year in the run-up to the decision. Currencytraders are losing faith in the prospects of continued monetary-policy divergence with central banks in Europe andJapan.

Bloomberg's Dollar Spot Index, which measures the currencyagainst major peers, dropped 0.3 percent as of 1:14 p.m. inNew York, reaching the weakest level since Sept. 13. The greenbackdeclined 0.3 percent to $1.1227 per euro and added 0.4 percent to100.73 yen.

Dollar weakness opens up opportunities for the carry trade toborrow in the U.S. and invest in higher-yielding currencies,according to Redeker of Morgan Stanley, which is the world's10th-largest currency trader according to Euromoney magazine. TheNorwegian Krone jumped 1.9 percent, touching the strongest sinceMay, and South Korea's won gained 1.5 percent.

“When you look at what does it mean for the high-yielding,emerging-market currencies, in some cases you can make gains up to8 to 9 percent,” Redeker said.

The Fed's “dot plot,” which it uses to signal its outlook forthe path of interest rates, shows that policy makers expect onequarter-point rate increase this year, followed by just two nextyear. Morgan Stanley expects no December hike this year, Redekersaid in a Bloomberg Radio interview.

Regardless of when the Fed moves next, dollar bulls face theprospect of the slowest and shallowest tightening cycle in recenthistory, based on the market for overnight index swaps, whichreflect expectations for the fed funds effective rate. Thecontracts imply the rate will rise to about 0.9 percent in three years from0.38 percent now—essentially just two hikes during the next 36months.

“The market has effectively had 18 months of disappointment withchasing the dollar higher and has reduced dollar positioning,”Steven Saywell, global head of foreign-exchange strategy at BNPParibas SA, said at a briefing in New York. “There's a lack ofpolicy divergence.”

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