Goldman Sachs: USD Remains In Bearish Trend, Differentiation To Creep In

Thursday saw Goldman Sachs note that they "think the broad U.S. Dollar remains in a bearish trend, and we still see a strong case for structural weakness over coming quarters due to the likely persistence of deeply negative real rates, the Dollar's high valuation, and our economists' optimistic view on global growth. But over the short term, Dollar trends will likely be driven by (i) Covid developments in the US and continental Europe, (ii) polling related to the US election (with a tighter race likely supporting the Dollar on the margin), and (iii) fund flows, which have increasingly favored non-US assets. Therefore, we expect some performance differentiation against the Dollar amongst G10 crosses. Our highest conviction view in G10 FX at this stage remains long EUR, and especially NOK, the satellite currency with the best domestic fundamentals. That said, we see a few tactical downside risks to the EUR that bear close watching, including the ECB meeting on September 10 and virus developments in Europe relative to the US. We generally also favor Dollar shorts versus pro-risk currencies, particularly over the medium term, due to our optimistic economic forecasts, which assume vaccine approval by the end of the year."