Gloomy outlook issued for US dollar
The US dollar could weaken by as much as 15% against major world currencies over the next 18 months, as inflation continues to cool, allowing the Federal Reserve to loosen its monetary policy, according to Eurizon SLJ Capital.
A research note released on Tuesday by the firm’s chief executive, Stephen Jen, said the US Federal Reserve is likely close to – or already beyond – peak hawkishness, meaning that rate cuts are on the horizon.
The Fed’s nine previous hikes, in addition to the tighter credit conditions caused by the US banking crisis, already suggest inflation is trending to the downside, he concluded.
“We expect US inflation to continue to decline at roughly the same pace as it rose in 2021 and the first half of 2022: historically, there has been scant evidence of downside stickiness in inflation, even if there is evidence of downside price and wage level stickiness,” Jen wrote in the note, cited by Business Insider.
“The already subdued level of economic activity in major parts of the world will, ironically, likely prevent global demand from collapsing,” which points to a significantly weaker US currency, the analyst argued.
The US Dollar Index, which measures the strength of the dollar against a basket of rival currencies, has slipped 2.46% over the last four weeks after a 7.9% gain in 2022.
According to Jen, in the next 18 months the greenback “is vulnerable to substantial (10-15%) depreciation.”
Stephen Jen is known for inventing the so-called dollar smile theory, in accordance with which the greenback tends to strengthen when the US economy is either strong or weak, but dwindles at times of stagnation.
“The key point to make here is that, consistent with our Dollar Smile framework, fading inflation with a soft landing should push the dollar into the deep trough of the Dollar Smile,” Eurizon strategists said, noting “this could mean 10% generalized dollar depreciation this year, and more next year.”
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