The latest stimulus plans announced by the Federal Reserve is “disastrous” for the U.S. dollar, says long-time dollar bear Peter Schiff, warning that the greenback will go “through the floor” as investors dump the currency in favor of commodities like gold and oil.
The U.S. dollar index hit a four-month low of 79.134 in Asia trade on Friday after Fed Chairman Ben Bernanke unleashed a third round of quantitative easing, pledging to keep buying agency-backed mortgage bonds until the U.S. unemployment picture improved.
“This is a disastrous monetary policy; it’s kamikaze monetary policy,” Schiff told CNBC Asia’s “Cash Flow.” “The dollar index is going to go down to 40, it might even go to 20 — I mean this is going to be in free fall at some point… ultimately there’s going to be a currency crisis.”
According to Schiff, the Fed will not be able to produce a thriving U.S. economy by “debasing” the dollar, and printing more money is not going to solve the country’s problems.
“What we actually need is less money printing, we need higher interest rates, more savings, more production, more exports and what the Fed is doing is inhibiting that from happening,” he said.
Schiff, who has been a vocal critic of Fed’s stimulus measures, argues that instead of cheap money from the Fed going in to sectors of the economy like real estate, as it hopes, the money will be going into commodities.
“The American economy depends on our ability to print money and trade it for what the rest of the world produces, but as the dollar is falling through the floor, nobody is going to want to trade their stuff for our rapidly depreciating paper,” Schiff added.
While other strategists agree that the U.S. dollar will continue to see downward pressure in the coming months, they don’t think an extreme case scenario like debasement will take place.
Sean Callow, Senior Currency Strategist, Westpac Bank in Sydney, says the fact that easing by Fed is to remain open-ended means the central bank is open to further measures and that will be negative for the dollar for some months.
"We also have the fiscal cliff coming up, so there are some powerful negatives for the dollar," Callow said. But he added that while there is no doubt that a weaker dollar is a side effect of quantitative easing, “the Fed's focus is not to weaken the dollar. The focus is on the housing sector."
Paul Mackel, Head of Asian FX Research at HSBC in Hong Kong, backs that sentiment saying the Fed is focusing on macro factors like employment. But he remains bearish on the dollar and says now is the time to sell.
“I think right now you sell the dollar on rallies, that’s going to be the theme going over the next month going into the U.S. election,” Mackel said.
Asian currencies like Malaysian Ringgit and the Philippines Peso are Mackel’s top picks against the U.S. dollar.
- By CNBC's Rajeshni Naidu-Ghelani