Dollar Can Drop a Lot Further, Says Most-Accurate Forecaster MPS

(Bloomberg) — The dollar’s decline has much further to go, according to the best-performing forecaster for major-exchange rates in Bloomberg’s most recent ranking.

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Italy’s MPS Capital Services Banca per le Imprese SpA, part of the banking group that includes Banca Monte dei Paschi di Siena SpA, scored top position in Bloomberg’s accuracy rankings for the first quarter of 2023. Now, MPS chief strategist Luca Mannucci is warning that the greenback could plunge as much as 5% against other currencies in the second half.

The prediction hinges on his view that the US will be dragged into recession — a situation likely to be fueled by the Federal Reserve’s aggressive fight against inflation and lingering risk from recent banking turmoil.

The Bloomberg Dollar Spot Index has already fallen 1.6% so far this year and is down roughly 10% from September’s record high. The most recent moves have come amid mounting pressure for the Fed to stop hiking interest rates and growing risk of an economic slump.

“We expect the recession in the US by the year end,” Mannucci said in an interview. “The tightening of the monetary policy will drag down on the economy.”

At the same time, Mannucci warned that the collapse of several regional US banks — as well as the saga surrounding Credit Suisse Group AG — will also result in tighter credit conditions and hurt the economy.

Cooling economic data in the US this week rekindled concern about a recession. Mannucci said the Fed will likely only raise rates by another quarter-point, while the European Central Bank may opt for at least two more quarter-point hikes.

That should help push the dollar down about 3% against the euro in the coming months, he said.

The greenback also stands to fall against the yen as the Bank of Japan eventually eases yield-curve controls, bringing the dollar-yen pair to 120 by year’s end, according to Mannucci. It currently trades near 132.