Goldman Holds Fast to Strong Dollar Call as Currency Rebounds

Goldman Sachs Group Inc. is holding fast to its dollar bullish stance, unmoved by the currency’s recent slide. Gains...

Goldman Sachs Group Inc. is holding fast to its dollar bullish stance, unmoved by the currency’s recent slide. Gains in the greenback Monday against its higher-yielding peers showed at least some investors agree.

An index tracking the greenback against 10 major peers has dropped 3.5 percent since Feb. 29, on track for its worst month since April 2011, as a cautious policy approach by the Federal Reserve undermined demand for the currency. While the Fed signaled an expectation for two interest-rate increases this year, economists at Goldman are predicting stronger economic outcomes will force policy makers into three hikes. New Zealand’s dollar led declines against the greenback Monday after a report showed consumer confidence weakened in the first quarter and as Asian equities declined.

“The underlying case for the divergence trade is stronger, not weaker, given that a dovish Fed will spur U.S. outperformance versus the euro zone and Japan,” wrote Goldman analysts led by Robin Brooks, the New York-based head of currency strategy. “Going up is hard to do, but the dollar will go up.”

The Bloomberg dollar index rose 0.1 percent to 1,187.03 as of 10:10 a.m. in Singapore, after dropping 1.3 percent last week. The greenback rose 0.7 percent to 67.60 cents per kiwi and climbed 0.4 percent to 75.80 cents per Aussie.

The greenback weakened 0.2 percent to 111.31 yen after touching 110.67 on March 17, its lowest level since October 2014. It was at $1.1282 per euro from $1.1270.

Japanese markets are closed today for a public holiday.

The “underlying appreciation pressure is large,” for the dollar, the Goldman analysts wrote. Their forecasts for the Fed tightening would suggest a 15 percent appreciation in the U.S. currency, they said.

Fed Bets

The market’s expectations of the Fed are far more subdued. Traders put the chances of a rate increase in June at 39 percent at the end of last week, according to futures data compiled by Bloomberg. The odds of a single 25-basis-point move by December were at 68 percent, the data showed. The calculation assumes the effective fed funds rate will average 0.625 percent after the Fed’s next increase.

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Dollar Bulls

Policy makers last week lowered their median rate projection to two increases by year-end from a forecast of four in December citing the potential impact from weaker global growth and financial-market turmoil on the U.S. economy.

Hedge funds and other large speculators reduced bets on dollar gains against eight major currencies to the lowest level since August 2014 in the week to March 15. The so-called net longs dropped to 88,214 contracts, according to the Commodity Futures Trading Commission in Washington.

“If I had seen the statement from the Fed in advance, I wouldn’t have expected quite so large a response in markets because they’re still saying they’re intending to hike rates again this year, twice,” Sean Callow, a senior currency strategist in Sydney at Westpac Banking Corp., said in a Bloomberg Television interview. “The dollar will start to stabilize in the months ahead.”

The greenback is set to strengthen toward $1.06 per euro and 120 yen in the second half of the year, and around 70 cents versus the Aussie, Callow said.

(An earlier version of the story was corrected to fix the low for the yen.)

–With assistance from Angie Lau To contact the reporters on this story: Candice Zachariahs in Sydney at, Netty Ismail in Singapore at To contact the editors responsible for this story: Garfield Reynolds at, Tomoko Yamazaki

By: Candice Zachariahs and Netty Ismail

©2016 Bloomberg News

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