The dollar is vulnerable to sliding another 10% to 15% in the next year and a half as cooling inflation allows the Federal Reserve to cut interest rates, according to Stephen Jen at Eurizon SLJ Capital Ltd.
(Bloomberg) — The dollar is vulnerable to sliding another 10% to 15% in the next year and a half as cooling inflation allows the Federal Reserve to cut interest rates, according to Stephen Jen at Eurizon SLJ Capital Ltd.
The US central bank is likely to be very close to, if not already past, its peak hawkishness and its next move will be to lower borrowing costs, Jen — the inventor of the dollar smile theory — and his colleague Joana Freire wrote in a research note.
“With so much Fed tightening already in place, the risks to inflation in the US and the world are heavily biased to the downside,” they wrote.
“The already subdued level of economic activity in major parts of the world will, ironically, likely prevent global demand from collapsing,” and this scenario points to a significantly weaker dollar, they said.
Bloomberg’s dollar gauge is on track for a fourth straight week of declines, down 0.5% since Friday, after data showing weaker-than-expected US factory activity and a drop in job openings. Investors will focus on figures for the services sector and employment Wednesday.
Jen is basing his forecast on expectations US inflation will slow at roughly the same pace it rose in 2021 and the first half of last year — a period marked by the steepest rise in consumer prices since the 1980s. The greenback has already been in a downtrend, with Bloomberg’s gauge of the dollar falling 10% from last year’s high set in September.
Read More: Inventor of ‘Dollar Smile’ Says Soft Landing Beckons for US
The dollar smile theory, which Jen invented with Morgan Stanley colleagues in 2001, predicts the US currency tends to strengthen when the US economy is either very strong or weak, but declines when growth is middling.
The US economy is likely to “stay in the trough of the Dollar Smile and not move to its left wing,” Jen and Freire wrote. “Recent data continue to conform to this macro scenario that we have favored in the past quarters.”
–With assistance from Libby Cherry.
(Updates with US economic data in fifth paragraph.)
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