Economist Stephen Roach warns that the surging coronavirus will eventually crash the dollar and trigger a double-dip recession.
“With the infection rate soaring right now, a still vulnerable U.S. economy is likely to experience further lockdowns,” the Yale University senior fellow recently told CNBC.
Roach warns economic lockdowns are inevitable to halt the COVID spike.
“That’ll lead to a temporary relapse in the economy, probably in the first quarter,” said Roach, who was chairman of Morgan Stanley Asia during the deadly 2003 SARS epidemic.
“We’ve had those relapses in 8 of the last 11 business cycle upturns, and I don’t think this one is an exception to that rule,” Roach said.
Roach also paints a gloomy future for the greenback.
“This is just the early stages,” Roach noted. “The pressure on the dollar is likely to be even more intense. ... We need fiscal relief to address this really difficult economic situation.”
Meanwhile, the greenback is spiraling lower, probing levels last seen in April 2018, judging by a Bloomberg index. The tumble is part of a broader move across financial markets to price in brighter growth prospects for 2021 and the potential for superior investment opportunities outside the U.S., in large part as hopes for a coronavirus vaccine build.
Dollar bears are feeling encouraged by the breadth of the currency’s declines this week: The euro, the Australian and Canadian dollars and the Korean won have all touched their highest levels in more than two years, while the Swiss franc is at its strongest since 2015.
“We are seeing money being put back to work after the defensive positions held in the dollar,” Chris Turner, a currency strategist at ING Groep NV, told Bloomberg. “Vaccine news is adding weight to the view of a synchronized global upturn in 2021; the dollar can fall another 5-10% next year.”
Meanwhile, worse-than-expected jobs growth in November spurred bets of a new fiscal stimulus package to help lift the economy from its worst downturn in decades.
Nonfarm payrolls increased by 245,000 last month after rising by 610,000 in October, the Labor Department said on Friday. That was the smallest gain since the jobs recovery started in May.
"For now, the job market recovery is over until the winter wave of COVID-19 is behind us," said James McDonald, CEO and chief investment officer of Hercules Investments, based in Los Angeles.
"Whether or not we see a double-dip recession in the U.S. depends on the interplay between the severity of the shutdowns and their impact on the economy over the winter and the size of potential stimulus from Congress and the Federal Reserve," McDonald told Reuters.
A $908 billion stimulus plan gained momentum in Congress on Thursday after a months-long standoff between Republicans and Democrats over aid for businesses and millions of people affected by virus-led shutdowns.
The two parties also face a Dec. 11 deadline to pass a $1.4 trillion budget or risk a shutdown of the government.
"The market is going to be focused on the progress that is being made on the aid package. We are getting very close... I wouldn't be surprised to see some sort of deal, as early as Monday," said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.
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