Stephen Roach says two currencies could benefit most from a weaker U.S. dollar

Published Tue, Oct 20 202012:27 AM EDT

(This story is for CNBC PRO subscribers only.) SINGAPORE — The conditions are ripe for a sharp weakening in the U.S. dollar in the coming year, prominent economist Stephen Roach told CNBC on Tuesday. The U.S. current account and trade deficits are deteriorating rapidly, while domestic savings are being weighed down further, said Roach, a senior fellow at Yale University. At the same time, the U.S. will likely have to spend more on stimulus to support an economy that's been hit by the coronavirus pandemic, he noted. "There's no free lunch, we're gonna have to provide foreign investors — who lend us money to fund our deficits — with some incentive for doing so," Roach, a former chairman at Morgan Stanley Asia, told CNBC's "Squawk Box Asia." With the Federal Reserve indicating that interest rates will stay near zero in the coming years, that incentive for foreign investors will have to be in the form of a weaker currency, the economist added. And the two main beneficiaries of a weakening U.S. dollar are the euro and Chinese yuan , said Roach. He called the euro "the most undervalued currency in the world," and added that while the Chinese yuan has been appreciating, it could climb higher "provided China stays on a path of reform and continue to open up its financial markets." 'Extremely sharp' depreciation The U.S. dollar is headed for an "extremely sharp" decline of 35% by the end of 2021, Roach said. He explained that his forecast is for the U.S. dollar broad trade-weighted effective exchange rate published by the Bank of International Settlements. There's no free lunch, we're gonna have to provide foreign investors — who lend us money to fund our deficits — with some incentive for doing so. senior fellow, Yale University Stephen Roach The BIS measures the greenback's value against 40 currencies, while the U.S. dollar index — which many investors prefer for its real-time updates — compares the greenback with just six major world currencies. The U.S. dollar index will also weaken over the coming year, but not as "sharply" as the BIS measure, said Roach. Since the start of the year, the U.S. dollar index has depreciated by around 3.07% as of Monday, according to data by Refinitiv. China's recovery is 'sustainable' Roach, one of the leading experts on Asia in the U.S., said China's latest economic data releases are "encouraging." The world's second-largest economy on Monday said its gross domestic product grew 4.9% in the third quarter compared to a year ago. "It is a hopeful sign that large economies can, in fact, recover from a devastating health shock — provided they take aggressive actions to contain the disease itself," Roach said in a note to CNBC before his Tuesday interview. Barring any setback on the Covid-19 containment front, "China's recovery is impressive and most likely sustainable," he added. But the Asian economic giant must get its debt under control, Roach said. China's total debt-to-GDP ratio of over 300% is "too high," but the effort to deleverage was put on hold as authorities manage the aftermath of the coronavirus outbreak, he noted. "They do clearly have a need to reduce their debt-to-GDP ratio and the sooner they get back to that, the better," Roach said on CNBC's "Squawk Box Asia."

Stephen Roach of Yale University.

Frederic J. Brown | AFP | Getty Images

(This story is for CNBC PRO subscribers only.)

SINGAPORE — The conditions are ripe for a sharp weakening in the U.S. dollar in the coming year, prominent economist Stephen Roach told CNBC on Tuesday.

The U.S. current account and trade deficits are deteriorating rapidly, while domestic savings are being weighed down further, said Roach, a senior fellow at Yale University. At the same time, the U.S. will likely have to spend more on stimulus to support an economy that's been hit by the coronavirus pandemic, he noted.

"There's no free lunch, we're gonna have to provide foreign investors — who lend us money to fund our deficits — with some incentive for doing so," Roach, a former chairman at Morgan Stanley Asia, told CNBC's "Squawk Box Asia."