The US economy’s recovery is in “tatters” after the latest rise in coronavirus cases and new restrictions, while the dollar could fall another 20% amid low interest rates and a yawning budget deficit, according to Yale economist and former bank chairman Stephen Roach.
“The economy is slipping right before our very eyes,” Roach said in an interview on CNBC’s “Trading Nation” on Monday, yet “the markets do not seem to care.”
He told CNBC: “That gives the markets conviction to look through literally anything, from political insurrection to the likelihood of a double-dip, to a V-shaped recovery that’s in tatters. The markets do not seem to care.”
Markets have also focused on the likelihood of more stimulus under President-elect Joe Biden and the Democrats, who last week won elections that will give them control of Congress.
Roach said more stimulus is “appropriate given the severe economic distress that continues to persist”.
Yet he said there would be “consequences”. A higher budget deficit would lower domestic savings and increase the current account deficit, Roach argued, combining with ultra-loose monetary policy to hit the dollar.
“I do see another 15 to 20% downside to the broad dollar index over the course of this year,” Roach said. The dollar has fallen more than 7% against a basket of currencies since January 2020.
He said this reflected “not just the current account deficit, but the strength of the euro”. Roach added that, “most importantly”, the Fed holding interest rates at zero would forestall “a normal interest-rate hike that might otherwise boost the dollar”.
However, the dollar has climbed more than 0.5% so far this year, taking the dollar index to 90.44. Rising bond yields and the prospects of higher growth have made the currency and US assets more attractive to non-US investors.
Meanwhile, the division between the health of the US economy and markets continues to widen. Markets are riding the wave of monetary and fiscal stimulus and looking ahead to the middle of the year, when they hope vaccines will have allowed some semblance of normal life to return.
Roach said stimulus may cause inflation “down the road”. But he said: “With aggregate demand remaining weak in the US, I think it’s going to take a while before that shows up.”