Goldman Sachs Forecasts Weaker Dollar As Fed Begins Interest Rate Reversal: Report

Banking giant Goldman Sachs is forecasting a weaker US dollar following the interest rate reversal from the Federal Reserve.

In a new note to investors covered by Bloomberg, Goldman strategists say a gradual weakening of the greenback is expected now that lower rates have lessened the dollar’s appeal.

The bank said the Fed’s recent cut of 50 basis points (bps) showed a willingness to respond aggressively to a potential economic downturn, justifying expectations of relative weakness for the dollar against other major currencies including the euro, pound and yen.

Goldman is now predicting upward moves in the euro and the pound against the dollar, predicting $1.15 for EUR/USD, a 2.67% boost, and $1.40 for GBP/USD, a 4.47% rally from current prices.

Says the Goldman strategists,

“This balance should entail a weaker dollar over time, but we still expect that to be a gradual and uneven process. We also still believe the dollar’s high valuation will not be eroded quickly or easily, but the bar has been lowered a bit…

Support for sterling is coming both from its risk beta as well as solid growth momentum and a patient BOE. Markets have priced out US recession risk, benefiting risky assets and pro-cyclical currencies like sterling.”

Goldman’s call for a weaker dollar differs from the forecast from German banking titan Deutsche Bank, who believes that a potential Donald Trump presidency will ultimately boost the dollar relative to other currencies.

“We think pricing for the Fed is too dovish and that the market is underpricing the dollar positive risks around a Trump victory, so we like buying the USD.”