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The “Dollar Smile” Will Zip From One Side to the Other, Jen Says

The “Dollar Smile” Will Zip From One Side to the Other, Jen Says

(Bloomberg) -- The emerging crowd of dollar detractors will soon have their comeuppance, when U.S. economic outperformance sees the greenback rebound, according to veteran market participant Stephen Jen.

Jen, who runs hedge fund and advisory firm Eurizon SLJ Capital in London, also rebuffed the recent argument made by his former Morgan Stanley colleague Stephen Roach that the dollar was heading for a “crash.” Roach, now based at Yale University, forecast a 35% drop in the dollar.

“The dollar is both a safe haven as well as a high-beta currency -- unique in the world,” Jen wrote in a note Wednesday, referring to its tendency to be more volatile than the overall market. “The dollar will not collapse just because pundits, scholars and strategists say it should.”

The “Dollar Smile” Will Zip From One Side to the Other, Jen Says

Jen is linked with the “dollar smile” frame of analysis, where the greenback appreciates in times of crisis, tends to weaken when the global economy is healthy and strengthens again when the U.S. outperforms.

“Most analysts seem to only believe in the left side (downward-sloping) of the Dollar Smile and don’t take the right side (upward-sloping) seriously,” Jen wrote. He predicted that “we will transit from the left side to the right side more swiftly than in any other cycle in modern history.”

After rising almost 10% this year through the peak of financial market coronavirus concerns in late March, the Bloomberg Dollar Spot Index has fallen back on optimism about a global economic recovery. The gauge is down over 6% since March 23.

Jen said the recent drop in the dollar simply reflected an easing sense of crisis, with renewed gains likely against most of the industrialized-economy currencies “soon.” Strong U.S. payrolls and retail sales data for May, along improvement in the Empire State index of regional manufacturing, are “only the early hints of what lies ahead,” he said.

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