Goldman Sachs: Why We Are Sticking With A Bearish Dollar Outlook For Now

Goldman Sachs note that "the U.S. Dollar has had a strong start to 2021, in contrast to our expectations. While a handful of currencies have gained vs. USD (e.g., CAD, GBP, INR), broad Dollar indices are all up 2-3% year to date. Despite the rebound, we have not revised our forecast for broad Dollar depreciation for the balance of the year, for a few reasons. First, market pricing of the Fed is now quite hawkish relative to our own expectations. The U.S. OIS curve discounts the first hike around January 2023, and a 0.7% funds rate by the end of 2023. In contrast, we forecast a first hike only in 2024 (as does the median Fed official, based on the Summary of Economic Projections). Second, we forecast strong GDP growth in most economies over the next year - because they all benefit from the vaccine-led reopening - not just the U.S.. For example, over the next four quarters, our economists expect GDP growth of +7.4% in the U.S., +7.1% in the Euro Area, and +11.6% in the UK. Admittedly, the Biden Administration's plans for another large fiscal easing raise the risk of continued U.S. outperformance, but a substantial degree of divergence is already priced in. Third, from a bottom-up standpoint, our constructive view on the Chinese Yuan (14% of the USD trade-weighted basket) partly holds us back from a more positive outlook for the greenback. With greater clarity on the Fed's reaction function, the main risk to our bearish Dollar outlook now relates to non-U.S. growth. Significant downside surprises to either Euro Area or Chinese growth could warrant upward revisions to our forecasts for USD crosses. At the same time, increased confidence in our upbeat European growth forecasts (e.g., due to accelerating vaccine distribution) would be reason to lean into Dollar shorts."