Goldman Sticks With Strong Dollar Call on Outlook for Rate Moves

Goldman Sachs Group Inc., one of the world’s top 10 foreign-exchange traders, is holding fast to its bullish-dollar stance, unmoved...

Goldman Sachs Group Inc., one of the world’s top 10 foreign-exchange traders, is holding fast to its bullish-dollar stance, unmoved by the currency’s recent slide.

A gauge of the U.S. currency advanced for a second day, paring a 3.6 percent drop in March that would be the measure’s worst monthly performance since April 2011. Economists at Goldman predict stronger economic outcomes will force the Federal Reserve policy makers to raise interest rates three times this year, supporting the greenback further. The central bank signaled last week it plans two interest-rate increases by Dec. 31, prompting banks such as Morgan Stanley to highlight the risk of near-term dollar weakness.

U.S. policy makers are scrutinizing reports for signs the domestic economy is withstanding their first interest-rate increase in almost a decade amid a slowdown in global growth. Officials stayed on hold at their March 15-16 meeting, citing overseas developments as a risk to their outlook, and lowered their projections for higher rates. The nation remains one of the few to be raising borrowing costs, with Europe and Japan deploying stimulus and negative rates to foster economic expansion.

“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 Spot Index, which tracks the currency versus 10 peers, added 0.2 percent to 1,188.63 as of 3:01 p.m. in New York. The greenback gained 0.3 percent to 111.86 yen, up from 110.67 on March 17, its lowest since October 2014. It climbed 0.2 percent to $1.1252 per euro.

‘Appreciation Pressure’

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

Goldman sees the dollar climbing to 95 U.S. cents versus the euro within 12 months, Brooks wrote in a separate note March 11. Goldman revived that forecast in January, less than two months after a thwarted call for the common currency to plunge after the European Central Bank’s December meeting — it jumped the most since 2009 — prompted a revision.

The market’s expectations for the dollar are more subdued. Hedge funds and other large speculators reduced bets on dollar gains versus eight major currencies to the lowest since mid-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.

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Speculators’ Bets

Traders put the chances of a rate increase in June at 42 percent, according to futures data compiled by Bloomberg. The odds of a single 25-basis-point move by December are at 73 percent. The calculation assumes the effective fed funds rate will average 0.625 percent after the Fed’s next increase.

Standard Bank Group Ltd. predicts that the setback in the U.S. currency’s long-term advance will be temporary. The bank sees the greenback rising for about another year, and strengthening to $1.10 per euro, 115 yen and $1.38 per pound in the next six months.

“The greenback has not become significantly overvalued against other advanced-country currencies,” said Steve Barrow, head of Group-of-10 strategy at Standard Bank in London. “What’s more, we’re still in the early stages of the Fed’s tightening cycle.”

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

–With assistance from Angie Lau Netty Ismail and Rachel Evans To contact the reporters on this story: Candice Zachariahs in Sydney at, Anchalee Worrachate in London at To contact the editors responsible for this story: Boris Korby at, Paul Cox, Michael Aneiro

By: Candice Zachariahs and Anchalee Worrachate

©2016 Bloomberg News

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