Foreign exchange analysts at Goldman Sachs expect that U.S. Dollar strength in global currency markets will last longer than forecasted previously.
The Euro to Dollar (EUR/USD) exchange rate dipped to 5-month lows at 1.06 last week before a tentative recovery to 1.0650.
Goldman has lowered both the 3 and 6-month EUR/USD forecasts to 1.05 from 1.08 and 1.10 respectively while the 12-month forecast has been cut to 1.08 from 1.12.
Goldman Sachs has based its forecast of modest dollar depreciation in 2024 on improved conditions outside the US together with a slowdown in the US economy.
Given recent developments, Goldman considers that there is a greater risk of extended US out-performance.
Federal Reserve interest rate cuts are also likely to be delayed while European central banks are liable to sanctioned ahead of the Fed.
In this context, Goldman expects policy divergence which will keep the dollar on the front foot.
Even if the Fed does cut rates, it expects that the dollar will remain a high-yield currency.
Goldman also considers the impact of the November US Presidential election with the dollar gaining support from expectations of a loose fiscal policy and increased trade restrictions.
Although the bank still expects gradual dollar losses over time, EUR/USD forecasts have been lowered.
Key Quotes:
"The key risk to our baseline forecast is that continued US outperformance complicates the Fed policy path."
"Dollar assets could continue to offer superior total returns that would boost demand for the currency."
"Our already-robust US growth forecasts give the FOMC the luxury of a later and more gradual policy adjustment."
"Policymakers in most other developed market economies will begin the cycle sooner with sequential rate cuts."
"The rate cuts we anticipate are unlikely to be significantly negative for the Dollar."
"The upcoming US election should also start to impact currency markets more directly."
"Our revised forecasts reflect our view that eventual depreciation has been downgraded and delayed."
"Long Dollar calls still represent good hedges against geopolitical and inflation risks."