The US greenback might weaken one other 15% over the subsequent 18 months as cooling inflation prompts the Fed to chop charges, analysis agency says

• The US greenback might weaken 10%-15% by the center of 2024, Stephen Jen at Eurizon SLJ Capital wrote in a notice.
• As inflation continues to chill, the central financial institution might reduce charges in 2023, which might result in the greenback’s depreciation, Jen stated.

The US greenback might weaken by as a lot as 15% within the coming four-to-six quarters as inflation continues to subside and the Federal Reserve loosens financial coverage, in keeping with a Tuesday analysis notice by Stephen Jen at Eurizon SLJ Capital.

For February, inflation as measured by the patron worth index cooled consistent with expectations, rising 6.0% year-over-year. That knowledge arrived forward of the Fed’s 25 basis-point price hike in March amid the turmoil of the Silicon Valley Financial institution disaster.

Inflation notched a excessive for the cycle in June 2022, with CPI clocking in at 9.1% year-over-year — the best price since November 1981. By the fourth quarter of this yr, Jen anticipates that studying to drop to under 4%.

“We anticipate US inflation to proceed to say no at roughly the identical tempo because it rose in 2021 and the primary half of 2022: traditionally, there was scant proof of draw back stickiness in inflation, even when there may be proof of draw back worth and wage degree stickiness,” Jen wrote within the notice.

To Jen, who invented the greenback smile concept, the Fed, in addition to the European Central Financial institution, is probably going near or already past peak hawkishness, and price cuts are looming.

The central financial institution’s 9 earlier price hikes, along with the tighter credit score circumstances sparked by the financial institution disaster, already sign inflation is trending to the draw back, he added.

The following 250 foundation factors of changes to the federal funds price, the strategists maintained, will likely be cuts.

The US Greenback Index—which measures the power of the dollar in opposition to a basket of rival currencies—has declined 2.46% over the past 4 weeks after it notched a 7.9% achieve in 2022. Within the subsequent 18 months, in Eurizon’s view, the foreign money “is weak to substantial (10-15 p.c) depreciation.”

Jen’s greenback smile concept, in the meantime, says the dollar strengthens when the US economic system is both sturdy or weak, however slips when development stagnates.

“The important thing level to make right here is that, per our Greenback Smile framework, fading inflation with a tender touchdown ought to push the greenback into the deep trough of the Greenback Smile,” the strategists stated. “This might imply 10 p.c generalised greenback depreciation this yr, and extra subsequent yr.”