Over the past few years, we have been resolutely bearish on the dollar, in contrast to the consensus view. The reasons behind our contrarian outlook are three-fold:
- We foresee lastingly low GDP growth now that the 2008 crisis has brought an end to the support previously provided by private sector debt—creating a shortfall we estimate at 1.8 percent a year, and pushing U.S. potential output down from its pre-crisis 3.0–3.2 percent range to somewhere between 1.5 and 2 percent today.
- We expect the Federal Reserve to stick to its unconventional monetary policy for now and the greenback to continue losing ground as a result. To make matters worse, the euro area has opted for a structurally deflationary policy mix to sustain the euro, even if that means undermining European industry.
- We anticipate an eventual inflationary exit from the 2008 financial crisis—one that will almost certainly affect the United States much sooner than the euro area.
These factors also prompted us to cut our projections for the dollar in June, when we simultaneously lowered our 2014 forecast for the U.S. economy—and thus for long-term Treasury yields as well. Although challenged by developments since the early summer, our bearish dollar outlook seems once again pertinent in the wake of this week’s FOMC meeting.
So just how low might the dollar fall?