(Bloomberg) -- As a decline in the dollar picks up speed, longtime bear Stephen Jen is convinced the US currency’s woes are only beginning.
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Mounting worries that the US economy may be losing steam and increasing optimism regarding growth abroad have dragged the dollar to a three-month low this week – belatedly confirming the views of Jen, the chief executive of London-based asset manager Eurizon SLJ Capital.
“An overvalued dollar that would actually weaken, that’s been our call,” said Jen, adding that he feels “somewhat vindicated” after predicting a weaker dollar over the past two years.
The Bloomberg Dollar Spot Index fell around 1% on Wednesday, extending a drop that has wiped out most of the gains it notched since the US presidential election last year.
Jen says the recent moves fit well with the “dollar smile“ framework he put forward more than two decades ago as a strategist at Morgan Stanley. The theory, which has caught on among some market participants, suggests that the greenback gains when the US economy is either in a deep slump or a strong expansion. Periods during which growth is moderating are more challenging for the currency, Jen says.
It doesn’t help that the dollar is, by Jen’s calculations, about 20% above its fair value. Jen points out that per capita income in Mississippi – among the poorest states in the US — is higher than the same measure in the UK, France, Italy and Japan, a sign that the currency’s purchasing power has reached excessive levels.
“I don’t think it’s going to be a crash for the dollar, but it’s a multi-year adjustment,” said Jen.
Jen’s bearish dollar view proved to be premature when the US economy steamed ahead last year while other countries struggled, sending the dollar ripping higher.
But the chorus of dollar bears has grown louder in recent weeks, as nascent signs of a weakening economy and US trade worries weigh on sentiment. The dollar gauge has fallen about 5% since peaking in January.
A barrage of tariffs imposed by President Donald Trump’s administration this week have done little to halt the dollar’s slide, despite investor expectations that such measures would actually boost the greenback.
The dollar’s decline accelerated on Wednesday after Germany announced plans to unleash hundreds of billions of euros for defense and infrastructure spending, sending the single currency higher.