Goldman Sachs On Broader USD Trends

The US bank weighs in on the dollar outlook post the US NFP disappointment on Friday. It sees tactical downside in the near term, but a supportive dollar backdrop over the next few months.

Goldman Sachs: "A little slower, a little lower. US economic activity has cooled further, supporting the case for the Fed to begin dialing back the degree of policy restriction. We see this as further crimping the right tail of the Dollar distribution—the disruptive scenario would be one where the Fed needs to deliver another hawkish policy shift against a host of foreign central banks that are moving in the other direction. After surpassing the 2023 highs last week, recent Dollar softening mostly reflects improving risk sentiment—helped in part by some calming of political uncertainty—as well as these domestic dynamics which have meant less US outperformance than earlier in the year. But we do not think it changes the bigger picture, and this has been the nature of the back-and-forth in markets for some time already. As the ECB noted in its last meeting, “the narrative of monetary policy divergence across the Atlantic had not played out strongly so far,” but the Dollar has still managed to strengthen. And, there is still a route for more meaningful Dollar upside. As our economists wrote this week, if tariff policy proposals were enacted, they would widen the policy and activity divides between the US and the rest of the world, with the Dollar playing an important role as the adjustment mechanism. With those proposals on the horizon, we think the resulting uncertainty should see broader markets focus more on trade risks in the coming months. Especially when combined with still-strong US asset market returns, this should make it difficult for FX investors to meaningfully shift allocations away from the Dollar over the next few months. So, we see room for tactical Dollar downside after the softer payrolls report, especially if President Biden drops out of the race and prediction markets move back to pricing more even odds for November, but ultimately think the Dollar will remain well-supported over the next few months even if the global picture continues to move into better balance."