(Bloomberg) -- Goldman Sachs Group Inc. has lowered its forecasts for the dollar against a wide range of currencies after the Federal Reserve slashed interest rates.
The bank expects the greenback to gradually weaken as lower US yields diminish its appeal. In turn, it has lifted its forecasts for several major currencies, including the euro, the pound and the yen.
Goldman’s new calls come after the Fed cut rates by half a point last week, a bold start to an easing cycle aimed at bolstering the US labor market. The bank said the decision demonstrated US policymakers’ willingness to respond more aggressively than peers to an economic downturn.
“This balance should entail a weaker dollar over time, but we still expect that to be a gradual and uneven process,” Goldman strategists including Kamakshya Trivedi wrote in a note. “We also still believe the dollar’s high valuation will not be eroded quickly or easily, but the bar has been lowered a bit.”
As a result of its new dollar view, Goldman is now even more bullish on the pound, predicting gains to $1.40 over 12 months, from $1.32 previously. That’s a level last seen in 2021 and among the highest forecasts on Wall Street.
The UK call is based on the Bank of England’s reluctance to accelerate the pace of interest-rate cuts, even as its peers in the US and the euro area ease more aggressively. While many strategists and investors say the BOE will eventually need to catch up on lowering rates, Goldman says the UK’s growth is still strong.
“Support for sterling is coming both from its risk beta as well as solid growth momentum and a patient BOE,” strategists wrote. “Markets have priced out US recession risk, benefiting risky assets and pro-cyclical currencies like sterling.”
The bank has also boosted its forecast for the euro, and now sees it strengthening to $1.15 in 12 months, instead of weakening to $1.08. It expects the yen to gain to 140 per dollar in the same time horizon, compared to a previous forecast of 150 per dollar.
Goldman has also raised its forecasts for the Chinese yuan, though it still sees the currency weakening from current levels. It sees it reaching 7.25 per dollar in 12 months, from 7.40 previously.
Goldman’s call for a broadly weaker dollar contrasts with the view from Deutsche Bank AG’s strategists, who said the start of Fed rate cuts will do little to shake the greenback’s high-yield status.
“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,” Deutsche Bank’s FX strategists led by George Saravelos wrote in a note.
(Recasts with Goldman’s dollar call, adds Deutsche Bank’s view.)
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