The US dollar is set for a significant decline, as projected by the leading forecaster for major exchange rates in Bloomberg’s most recent ranking. Italy’s MPS Capital Services Banca per le Imprese SpA secured the top position in Bloomberg’s accuracy rankings for Q1 2023. MPS Chief Strategist Luca Mannucci now warns that the greenback could plummet by up to 5% against other currencies in H2 2023.
US Recession: The Catalyst for Dollar’s Decline
Mannucci’s forecast is based on his belief that the US will be pulled into a recession, a scenario likely driven by the Federal Reserve’s aggressive stance against inflation and the residual risks from recent banking upheaval.
The Bloomberg Dollar Spot Index has already experienced a 1.6% decline this year and has dropped approximately 10% since its record high in September.
Recent fluctuations can be attributed to increasing pressure on the Fed to cease interest rate hikes and a growing risk of economic downturn.
The Tightening Monetary Policy and Its Consequences
“We expect the recession in the US by the year end,” Mannucci stated during an interview. “The tightening of the monetary policy will drag down on the economy.”
Furthermore, Mannucci cautioned that the collapse of several regional US banks and the ongoing saga surrounding Credit Suisse Group AG will lead to stricter credit conditions and economic damage.
Economic Indicators: Signs of a Looming Recession
Recent cooling in US economic data has reignited concerns about a recession. As a result, Mannucci anticipates that the Fed will likely increase rates by only another quarter-point, while the European Central Bank (ECB) may opt for at least two more quarter-point hikes. That could result in the dollar depreciating by around 3% against the euro in the upcoming months.
Additionally, the greenback is expected to weaken against the yen as the Bank of Japan (BoJ) gradually relaxes yield-curve controls. As a result, Mannucci predicts that the dollar-yen exchange rate will reach 120 by the end of the year, a significant decrease from its current rate near 132.
Navigating a Shifting US Dollar Landscape
The impending decline of the US dollar, as forecasted by top currency forecaster Luca Mannucci, is cause for concern among investors and market participants.
The potential recession in the US, driven by the tightening of monetary policy and the lingering effects of recent banking crises, will likely have far-reaching consequences.
As the economic landscape shifts, investors and businesses must adapt and prepare for a weaker US dollar and the challenges that may arise.