Is The US Dollar Under The Threat Of Inflation? Top Economist Predicts It Could Lose A Third Of Value

Yale University economist Stephen Roach warns the dollar is poised for a significant drop as a result of the growing U.S. budget deficit brought on by the coronavirus pandemic and President Trump’s trade policies.

Roach, a senior fellow at Yale’s Jackson Institute for Global Affairs and former chairman of Morgan Stanley Asia, said the U.S. currency could drop 35% against major rivals.

“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,” told CNBC this week. “The dollar is going to fall very, very sharply.”

The U.S. dollar index has been gaining in recent days but is down significantly from its mid-March high when the U.S. economy virtually shut down.

“Already stressed by the impact of the COVID-19 pandemic, U.S. living standards are about to be squeezed as never before. At the same time, the world is having serious doubts about the once widely accepted presumption of American exceptionalism,” Roach said in an earlier Bloomberg column.

In a separate Bloomberg op-ed, Roach said the dollar’s fall would come against a strengthening of China’s currency and the euro as well as the Mexican peso and Canadian dollar. Roach noted the dollar’s official share of foreign-exchange reserves has fallen from about 70% in 2000 to slightly less than 60% now, and the downtrend could gather momentum.

“America’s saving and current-account problems are about to come into play with a vengeance. And the rest of the world is starting to look less bad,” Roach said. “Yes, a weaker dollar would boost U.S. competitiveness, but only for a while. Notwithstanding the hubris of American exceptionalism, no leading nation has ever devalued its way to sustained prosperity.”

Roach said the administration decision to walk away from globalization and turn toward isolationism is a “lethal combination.”

Roach predicted higher inflation as the cost of imports increases and warned of a 1970s-style bout of stagflation – rising inflation and stunted economic growth. He said a change in the White House likely would make little difference as the focus remains on the effects of the coronavirus pandemic and the unprecedented spending to mitigate the damage.