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USD: Goldman Sachs Expects USD Weakness To Be Gradual & Uneven

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The US bank sees a weaker USD, albeit the process to be gradual and uneven. See below for more details. 

Goldman Sachs: "Fed brings better balance; adjusting our forecasts. With a 50bp rate cut, the FOMC most likely chose the option that leads to lower economic and financial volatility. The greater sense of urgency should help alleviate recession risks that have been evident in FX markets over the last few months. This is clear in the divergence between the broad Dollar, which has slipped only around 2% since the end of June and is flat over the last year, whereas the DXY, with its heavy weights in safer havens such as JPY and EUR, has fallen nearly 5%. That divergence also demonstrates that we may be reaching the limits of how much Dollar depreciation can be achieved from pricing the Fed’s policy reaction function alone. If those recession risks now abate, without a pronounced and unexpected deterioration in the labor market, further Dollar downside is likely to have a slightly different composition, driven instead by more cyclical currencies rather than EUR and JPY. Taking a step back, we have been arguing that Dollar depreciation over the last few months was a natural outcropping of approaching Fed cuts, but ultimately should be unwound if the Fed under-delivers and the US economy over-delivers. However, given slowing momentum in the labor market and the Fed’s demonstrated willingness to respond more aggressively to that risk relative to peers, the case for a full Dollar reset is weaker. However, as we look ahead, we continue to expect: (i) the US economy to outperform, (ii) China and the Euro area to underperform, and (iii) US real returns to remain attractive relative to peers and the previous cycle. In light of these considerations, we are revising a number of our FX forecasts to show continued—albeit diminished—US exceptionalism. We think this balance should entail a weaker Dollar over time, but we still expect that to be a gradual and uneven process. We also still believe the Dollar’s high valuation will not be eroded quickly or easily, but the bar has been lowered a bit." 

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The US bank sees a weaker USD, albeit the process to be gradual and uneven. See below for more details. 

Goldman Sachs: "Fed brings better balance; adjusting our forecasts. With a 50bp rate cut, the FOMC most likely chose the option that leads to lower economic and financial volatility. The greater sense of urgency should help alleviate recession risks that have been evident in FX markets over the last few months. This is clear in the divergence between the broad Dollar, which has slipped only around 2% since the end of June and is flat over the last year, whereas the DXY, with its heavy weights in safer havens such as JPY and EUR, has fallen nearly 5%. That divergence also demonstrates that we may be reaching the limits of how much Dollar depreciation can be achieved from pricing the Fed’s policy reaction function alone. If those recession risks now abate, without a pronounced and unexpected deterioration in the labor market, further Dollar downside is likely to have a slightly different composition, driven instead by more cyclical currencies rather than EUR and JPY. Taking a step back, we have been arguing that Dollar depreciation over the last few months was a natural outcropping of approaching Fed cuts, but ultimately should be unwound if the Fed under-delivers and the US economy over-delivers. However, given slowing momentum in the labor market and the Fed’s demonstrated willingness to respond more aggressively to that risk relative to peers, the case for a full Dollar reset is weaker. However, as we look ahead, we continue to expect: (i) the US economy to outperform, (ii) China and the Euro area to underperform, and (iii) US real returns to remain attractive relative to peers and the previous cycle. In light of these considerations, we are revising a number of our FX forecasts to show continued—albeit diminished—US exceptionalism. We think this balance should entail a weaker Dollar over time, but we still expect that to be a gradual and uneven process. We also still believe the Dollar’s high valuation will not be eroded quickly or easily, but the bar has been lowered a bit."