BofA Chief Strategist Calls For A 20% US Dollar Selloff, Turns Bullish On Gold And The Euro

Michael Hartnett, chief investment strategist at Bank of America, projected the start of a bear market for the U.S. dollar, predicting a 20% loss in the U.S. dollar index (DXY).

According to the most recent "The Flow Show" from Hartnett, markets are entering a new period of conflict, geopolitical isolationism, populism, fiscal excess, state intervention, regulation and redistribution. These factors will result in a world with 3%-4% inflation and 3%-4% interest rates.

Over the longer term, the strategist anticipates a 20% depreciation of the U.S. currency and maximum 3%-4% yearly gains from credit and equities. We remain “patient bears in a world of impatient bears," the expert stated.

The biggest exchange-traded fund tracking the U.S. dollar index is the Invesco DB US Dollar Index Bullish Fund UUP, which is down by 2% year-to-date. The Invesco DB USD Index Bearish ETF UDN instead is an inverse or short U.S. Dollar ETF. 

Read Also: Benzinga's Quick Guide to Currency ETFs

Hartnett's Dollar Bearishness: Six Reasons

1. Skyrocketing U.S. budget deficit: U.S. federal deficit was $1.8 trillion past 12 months, 6.5% of GDP
2. U.S. debt ceiling deadline approaching with budget deficit of $378 billion in March, shrinking cash balances to just $109 billion. The U.S. government is on track to run out of cash by July 4.
3. Rising U.S. debt default probabilities: 5Y CDS at 45 basis points versus 15 basis points a year ago.
4. U.S. banking crisis means U.S. dollar less of a "safe haven."
5. The "petroyuan" idea gathers pace as war forces countries to deal in different currencies.
6. China and Japan reducing Treasury holdings; foreigners own $7.4 trillion of Treasuries.

Hartnett Turns Bullish on Gold: Hartnett argues the U.S. dollar is presently in its fourth bear market in the last 50 years, which bodes well for gold, oil, the euro and international stocks. However, the analyst noted that because pessimism is so strong right now, with nearly two full percentage points of Fed cuts priced in from June to the election, he expects the dollar to trade in range in the near-term once the Fed stops its hiking cycle on May 3.

Monthly chart of the U.S. dollar index (DXY) (with Hartnett's notes): The arrows represent the dollar's bear market – Chart: TradingView

Read Next: 'Sell The Last Rate Hike': BofA Sees Stock Market Tumbling On Bearish Sentiment, Regional Bank Run

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