Dollar Expected to Fall 15% with Fed Set to Cut Rates- Bloomberg

The dollar is vulnerable to an additional 10-15% decline over the next 18 months, as expected inflation subsides allowing the Federal Reserve to cut interest rates, says Stephen Jane at Horizon SLJ Capital.

The US central bank is close to — if not past — the peak stage of monetary tightening and its next step may be to lower borrowing costs, Jin, inventor of the dollar smile theory, and his colleague Joanna Frere wrote in a research note, adding: “With the Fed already taking Lots of tightening, inflation risks in the US and the world are strongly tilted to the downside."

US inflation expectations in 2024 fall to the lowest level in two years

They explained: "Ironically, the already weak level of economic activity in key parts of the world will prevent a collapse in global demand, and this scenario indicates a sharp decline in the dollar."

Jane's predictions are based on expectations that US inflation will slow to roughly the same pace as it rose in 2021 and the first half of last year, a period marked by the strongest rise in consumer prices since the 1980s.

Downtrend for the green currency

The greenback is already on a downward trajectory, with the Bloomberg Dollar Index down 10% from the high level recorded last September.

The Chinese yuan overthrows the dollar and becomes the most traded in Russia

The dollar smile theory, invented by Jin with his colleagues at Morgan Stanley in 2001, believes that the US currency tends to rise when the US economy is either strong or weak, while falling when growth is moderate.

Jane and Freer write that the US economy is likely to remain "at the bottom of the smile of the dollar and not move towards the left end of the smile". They added, "The most recent data continues to align with this macro scenario that we have projected in the past quarters."