EDITOR NOTE: Dollar doomsday scenarios are typically the domain of alarmist, doom-and-gloom, conspiracy theory types. At least, that’s how most investors have received the message--not so much news that educates but a narrative that entertains in a thrilling kind of way. Well, the truth of the story may not be in the story itself but in the environment that gives it truth value. Right now, the geopolitical environment coupled with the US budget deficit is putting the dollar in a highly precarious situation--one that may end in a devastating collapse. Remember: the dollar is only as good as the environment in which it operates. And right now, the environment is becoming increasingly hostile; certainly more so than what most Americans seem to realize.
The stronger dollar era may be on borrowed time.
Stephen Roach, one of the world’s leading authorities on Asia, is worried a changing global landscape paired with a massive U.S. budget deficit will spark a dollar crash.
“The U.S. economy has been afflicted with some significant macro imbalances for a long time, namely a very low domestic savings rate and a chronic current account deficit,” the former Morgan Stanley Asia chairman told CNBC’s “Trading Nation” on Monday. “The dollar is going to fall very, very sharply.”
His forecast calls for a 35% drop against other major currencies.
“These problems are going from bad to worse as we blow out the fiscal deficit in the years ahead,” said Roach, a Yale University senior fellow.
The U.S. Dollar Currency Index is up more than one percent over the past two weeks and is relatively flat so far this year. But Roach believes it’s no time to get complacent.
“The national savings rate is probably going to go deeper into negative territory than it has ever done for the United States or any leading economy in economic history,” he said.
Roach contends other forces are at play, too.
“At the same time, America is walking away from globalization and is focused on decoupling itself from the rest of the world,” said Roach. “That’s a lethal combination.”
The big question: Will it happen quickly or gradually?
His timeline is rough — over the next year or two, maybe more. However, Roach suggests a crash virtually inevitable, and it’s a risk investors shouldn’t ignore.
“Generally, it’s a negative implication for U.S. financial assets,” he added. “It points to the probability of higher inflation as we import more higher cost foreign goods from overseas, and that’s a negative for interest rates.”
He’s concerned a crash could spark a late 1970s-type stagflation crisis, when prices rose sharply while economic growth was muted.
According to Roach, not even a leadership change in Washington in November would be able to move the needle much — especially as lawmakers try to battle the economic impact from the coronavirus crisis with unprecedented stimulus measures.
“Policymakers to their credit have never had to deal with anything close to this disruption,” Roach said.
Originally posted on CNBC