Investor Luke Gromen is forecasting a breakdown in the dollar over time due to an increasingly unfavorable fiscal situation in the United States.
In a new interview on the Trader’s Edge podcast, Gromen says the Federal Reserve is essentially “stuck” with low interest rates due to the inability of the US government to afford to service its debt with a higher Fed funds rate.
Gromen says the Fed is being forced to cut rates not because inflation and the economy have cooled down, but because the US government’s financial situation is now so bad that it “requires” low rates.
The Forest for The Trees (FFTT) founder says the government needs to “juice” the stock market in order to get tax receipts back up above interest expenses.
“In America, because we don’t make anything on net anymore, the only way to get receipts up is to juice the stock market or reduce interest expense, and ideally both. So what’s the easiest way to juice the market and get interest expense down, it’s cutting rates. Since they couldn’t cut entitlements, they couldn’t cut defense, here we are.”
As a reaction to the realization that the US government is now cornered by mounting debt and interest expenses, Gromen says that a weaker dollar over the next year is the most likely scenario.
He predicts that the US dollar index (DXY), which pits the USD against a basket of other major foreign currencies, will drop up to 10% – a deep pullback for the world’s reserve currency.
“So to me, when I then look at this secularly, I think okay, tactically for the next month or two months as a trader, I think the dollar is probably a bid, and I think stocks and markets remain volatile.
Ultimately they go higher because I think the economy is going to be much stronger than people think, and that makes sense to me.
Secularly, I don’t know when it’s going to hit consensus that ‘Hh my god, they should be raising and they’re going to cut or they can’t raise because the fiscal situation is there,’ then I think we’ll get a follow through on the dollar that we’re starting to see.
We’ve seen the dollar go from 114 to 100, very quietly over the last two years. It’s bounced to 102, I think it goes to the low 90s over the next 12-14 months after this one to two-month period of tactical bounce we talked about from a trader’s perspective.”
Generated Image: Midjourney