While dollar weakness remains Morgan Stanley's base case, continued oil price gains would be a key risk to that view.

"Given the consensus expectation, geopolitically driven oil price supply shocks pose a key risk to the dollar short squeeze - potentially 2% or more," Morgan Stanley analysts David S. Adams and others wrote in a note.

Supply-driven oil price gains could trigger the consensus expected dollar short squeeze, but medium-term fundamentals still suggest that dollar strength is fading.

Short-term uncertainty could limit investor interest in shorting the dollar and oil-sensitive FX as market trading becomes increasingly dependent on trading conditions, similar to what happened in March 2022.

However, history shows that the dollar index tends to peak and weaken quickly after geopolitical escalations, and the dollar's positive correlation with stocks could limit dollar strength.

The medium-term bearish factors for the US dollar remain, and short-term geopolitical shocks may become an attractive opportunity for US dollar shorts to re-enter the market.

Continue to be long EUR/USD and short USD/JPY and CAD/CHF, but investors should manage risks carefully and may need to set wider stops given the risk of market volatility.