Earlier this year, economist Stephen Roach predicted a 35-percent crash in the U.S. dollar by the end of 2020 or early 2021. The U.S. Dollar Index was trading at around 96 at the time in June 2020. Now it’s trading at around 94.
Now Roach has taken it up a notch. The Yale University senior fellow sees growing odds of a double-dip recession and believes his “seemingly crazed idea” that the dollar will crash isn’t so crazy anymore.
The year 2021 will be brutal for the dollar, Roach told CNBC’s “Trading Nation” on Wednesday.
The former chairman of Morgan Stanley Asia, Roach highlighted two ominous second-quarter figures — the deficit and the savings rate — CNBC reported.
“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.
On the one hand, the U.S. is deepening its current-account deficit (the broadest measure of trade which includes investment), which could pass its previous record of 6.3 percent of gross domestic product.
On the other hand, the national U.S. savings rate stood at 1.4 percent in early 2020, its lowest point since 2011. From 1960 to 2005, the average savings rate was 7 percent. Roach says the federal deficit risks pushing this savings rate into an unheard-of zone of -5 percent to -10 percent, Morningstar reported.
Both measures experienced record deterioration in the second quarter.
“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 told CNBC. “The dollar is not immune to that time honored adjustment.”
What will cause the tension to snap?
President Donald Trump’s policies of protectionism, his dropping out of international organizations, and his mismanagement of the coronavirus crisis, Roach said.
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With U.S. coronavirus deaths exceeding 200,000 and a resurgence of infections in Europe, Roach is worried about the state of the economic recovery, CNBC reported.
“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 said. “The record of history suggests that this is not a time unlike what the frothy markets are doing to bet that this is different.”
Most economists and analysts are not particularly worried about the U.S. dollar, Morningstar reported.
“Those fears have been around since the mid-2000s, when people were proposing that the U.S. dollar as a reserve currency should be replaced by a basket of hard currencies,” said Paul MacDonald, chief investment officer at Harvest Portfolios Group. “When people talk of a collapse, they look at it through the lens of covid-19, geopolitics and society. We don’t subscribe to those views. In every past crisis, when the shit hit the fan, money was still flying to the U.S. dollar, including in April this year.”
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