He said that a clear hint from the Fed that rate cuts are on the way could set up further weakness in the dollar. “Once people start to believe that the Fed will have to cut interest rates in the next three to four months, the dollar’s decline is going to accelerate,” he said.
Over the course of 2007 the dollar could fall more than 5 percent against a basket of currencies, Gross said.
Financial markets have cut the chances of a Fed rate cut by March to about 25 percent after Friday’s stronger-than-expected November payrolls report, from over 80 percent following news of weak factory activity issued on Dec. 1. Futures fully reflect a rate cut to 5 percent by June.
Gross said that over time, the housing market downturn would exert more downward pressure on the overall U.S. jobs market and consumer spending, potentially pushing up the jobless rate.
It could be another one to two years before the effects of the housing bubble are unwound, he said.