Jeffrey Gundlach, no stranger to dire pronouncements, has a prophecy for the US dollar. It’s “doomed,” he says.
To blame are the spiraling federal budget deficit and the trade deficit, the CEO of bond investing powerhouse DoubleLine Capital contended in a CNBC interview. “Ultimately, the size of our deficits—both the trade deficit, which has exploded post-pandemic, and the budget deficit, which is, obviously, completely off the charts—suggest that in the intermediate term—I don’t really think this year, exactly, but in the intermediate term—the dollar is going to fall pretty substantially,” he said.
If the greenback really went into the tank, that would have an impact on the bond market. “That’s going to be a very important dynamic, because one of the things that’s helped the bond market, without any doubt, has been foreign buying, with the interest rate differentials having favored hedged US bond positions for foreign bond investors,” he added.
Typically, a lower dollar goes hand in hand with low interest rates. As Gundlach indicated, US rates, while historically low, are higher than in many other nations. Should overseas rates shoot up, there might be less incentive for foreign investors to plug money into America. This wouldn’t be good news for the US economy.
He is far from alone in his negative prognosis. Goldman Sachs has long argued that the US government and the Federal Reserve are making a mistake with their enormous stimulus efforts, which have flooded the world with dollars. The possibility of that triggering a long-lasting inflationary trend would further undermine the dollar’s value, the reasoning runs.
Sure enough, significantly higher inflation has appeared lately, with the Consumer Price Index (CPI) jumping 5.4% for the 12 months through June, although the Fed dismisses the increase as temporary due to bottlenecks in re-opening the economy.
Last year, the dollar had a surge when the pandemic first hit, as foreigners flocked to haven US assets. But then it ebbed, falling 7% for all of 2020, with rising hope about vaccines producing a pullback on offshore zest for American securities. This year, the buck is up about 3%, by the measure of the US Dollar Index, thanks to the higher US rates that Gundlach mentioned, as well as a strong stock market.
To Gundlach, known as the Bond King, the greenback won’t fall in the near future. The dollar index—which tracks the world’s reserve currency against a group of six other denominations—traded around 92.6 on Thursday, up about 0.25% on the session. “When it was below about 89, we announced very publicly that we were positive on the dollar for the near term,” Gundlach said.
The longer term is what worries him. “It’s a question of what your horizon is,” Gundlach said. “In the short term, the dynamics have been and will continue to be in place for the dollar to be marginally or moderately stronger.” He added, “In the longer term, I think the dollar is doomed.”
If so, the fallout would be widespread. The US dollar has been the international reserve currency for decades. This means other nations’ central banks hold it as the ready means to pay debts and propel commerce. If the nation’s currency lost a lot of its value, the dollar couldn’t fulfill those useful roles.