The U.S. dollar dipped from a two-month peak early Friday as renewed hopes of stimulus eased investors’ concerns about the economic recovery amid the coronavirus-induced recession.
The dollar index edged down to 94.34 after rising to a two-month high of 94.601 on Thursday.
But even as the mighty dollar sits just below its two-month high, Brown Brothers Harriman’s Win Thin warned this week that the greenback won’t stay at this level.
Thin argues that the dollar will fall another leg lower to test its February 2018 lows—or around “88 and change”—implying around a 7% decline from current levels.
“Since the pandemic really intensified in March, we’ve seen the dollar gain from buts of risk-off,” Thin, the firm’s global head of currency strategy, said. “But really, those gains have not been long lasting. The headwinds are building on the dollar and the U.S. economy. So, I think the recovery maybe gets pushed out into early 2021.”
The strategist said his base case for the dollar takes into account the resurgence in coronavirus cases both nationally and abroad, as well as the likelihood that lawmakers won’t be able to pass another stimulus bill before the November presidential election.
“The odds are falling precipitously,” Thin said. “We’re seeing softness in the U.S. economic data as the [current] stimulus runs out. To me, that’s all dollar negative.”
Economist Stephen Roach this week issued an even more dire forecast for the dollar.
Roach said that he not only sees rising odds of a double-dip recession, but believes his “seemingly crazed idea” that the dollar would crash doesn’t look so crazy anymore.
“We’ve got data that’s confirmed both the saving and current account dynamic in a much more dramatic fashion than even I was looking for,” Roach said, pointing to two ominous second quarter signs.
“The current account deficit in the United States, which is the broadest measure of our international imbalance with the rest of the world, suffered a record deterioration in the second quarter,” Roach said. “The so-called net-national savings rate, which is the sum of savings of individuals, businesses, and the government sector, also recorded a record decline in the second quarter going back into negative territory for the first time since the global financial crisis.”
Roach predicted in June—when the dollar was trading around 96—that it would plunge 35% within the next year or two. But now, Roach sees such a precipitous fall happening by the end of 2021.
“Lacking in saving and wanting to grow, we run these current account deficits to borrow surplus saving, and that always pushes the currencies lower,” Roach said. “The dollar is not immune to that time honored adjustment.”
With coronavirus deaths in the U.S. topping 200,000, Roach is concerned about the state of the economic recovery and puts the probability of a double-dip recession above 50%.
He bases that prediction on historical evidence, stating that in eight of the past 11 business-cycle recoveries, economic output has risen briefly and then fallen.
“It’s certainly something that happens more often than not,” Roach said.
“As we head into flu season with the new infection rates moving back up again with mortality unacceptably high, the risk of an aftershock is not something you can dismiss,” Roach concluded. “So that’s a tough combination. And I think the record of history suggests that this is not a time, unlike what the frothy markets are doing, to bet that this is different.”