Dollar Smile Theory Inventor Says Greenback May Decline Another 10-15%

The inventor of the Dollar Smile Theory and CEO at Eurizon SLJ Capital, Stephen Jen, reportedly sees the greenback vulnerable to another 10% to 15% decline in the next year and a half as moderating inflation permits the Federal Reserve to reduce interest rates.

What Happened: Jen and his colleague Joana Freire wrote in a research note that the U.S. central bank may be very close to, if not already past, its peak hawkishness, and its next move will be to lower borrowing costs, according to a Bloomberg report.

Also Read: How To Invest In Startups

"With so much Fed tightening already in place, the risks to inflation in the US and the world are heavily biased to the downside," they wrote.

"The already subdued level of economic activity in major parts of the world will, ironically, likely prevent global demand from collapsing," and the scenario points to a significantly weaker dollar, they stated.

Jen is basing his forecast on expectations that inflation will cool at roughly the same pace it rose in 2021 and the first half of last year — a period that saw the steepest rise in consumer prices since the 1980s, the report said.

Dollar Smile: Jen invented the Dollar Smile Theory along with his Morgan Stanley colleagues in 2001, the Bloomberg report stated.

According to the theory, the dollar could rally under two different extreme and opposite situations — when the U.S. economy significantly underperforms the rest of its peers or ends up outperforming them. However, if the economy modestly leads or lags, the dollar tends to weaken.

The U.S. economy is likely to "stay in the trough of the Dollar Smile and not move to its left wing," Jen and Freire wrote. "Recent data continue to conform to this macro scenario that we have favored in the past quarters."

Read Next: Gold Eyes Record High On Safe-Haven Status, Weak Dollar, Hopes Of Softening Fed: Peter Schiff Sees ‘Spectacular’ Rally