Financial crisis predictor: US recession at the earliest by the end of the year, dollar decline not over

Source: Jinshi Data

While growing optimism around a trade deal may calm investors somewhat, one senior strategist believes the market should brace for further pain.

David Roche, former chief global strategist at Morgan Stanley and head of Quantum Strategy, believes the value of the dollar could plummet by about 15%-20% in the next five to ten years, and that the U.S. economy could face a more imminent recession by the end of 2025.

Roche is a veteran investor who correctly predicted the financial crises of 1997 and 2008.

Roche's main concern is that Trump's trade conflicts are damaging the U.S.'s reputation in global financial markets and causing investors to flee U.S. assets.

"Reciprocal tariffs undermine America's image of 'exceptionalism' - the idea that global money flows to the US by default. When the US economy underperforms other economies, that money flows out, dragging down the dollar and asset prices," he said.

The dollar has continued to fall since Trump launched the reciprocal tariffs. The dollar index, which measures the greenback against a basket of currencies, is 8% lower than when he returned to the White House. Roach believes the decline is far from over as foreign investors have lost interest in the US and dollar-denominated assets.

Goldman Sachs estimates that foreign investors sold about $63 billion worth of stocks in the two months to April 25.

Roach suggested the trend could continue, adding that $63 billion is "nothing" considering that foreign investors own about 18% of the US stock market.

U.S. Treasuries have also been hit by the trade conflict, with U.S. bond yields spiraling higher at the peak of market volatility in early April. This is bad for the value of the dollar because it falls as demand for US assets weakens.

Based on the real effective exchange rate (REER), the value of a currency adjusted for the weight of trade between two countries, Roach said the dollar still has room to fall. Data from the Bank for International Settlements showed that the U.S. real broad effective exchange rate index was about 112 in March, still about 20% higher than the level in 2008 when Roach believed the dollar began to be overvalued. Other Wall Street forecasters have also sent similar signals. Deutsche Bank said in its latest report that the United States is in a "dollar bear market," noting that "the rest of the world is less willing to finance the United States' growing twin deficits."

Jan Hatzius, chief economist at Goldman Sachs, said he believes the dollar has "considerable room to fall."

"The weaker dollar reinforces our view that the cost of the U.S. tariff increase will be borne primarily by U.S. consumers rather than foreign producers," Hatzius wrote.

Given that big changes in global trade take time, a large-scale withdrawal from the United States could take five to ten years, Roach said. But he sees more imminent knock-on effects as the dollar weakens - chiefly a possible recession by the end of 2025.

Weaker demand for U.S. Treasuries could lead to problems financing the government. While Trump has promised that tariffs will lead to "huge amounts of money" flowing into the U.S., Roach said that's unlikely because tariffs would hinder trade.

The overall impact of the trade conflict could dampen growth and could lead to a recession as early as the end of this year or early 2026, he said.

"I think there could be a crisis in the current budget when the market realizes that the money is not going to be provided by tariffs and foreigners are not going to be pouring money into the U.S. like they were before," he said.

Fears of a recession have been rising as traders assess the potential impact of the trade conflict on global growth. Eighty percent of global fund managers in a new Bank of America survey believe the biggest tail risk for the market is a global recession caused by the trade conflict.