Foreign exchange analysts at Wall Street investment bank Goldman Sacks maintain a view that the U.S. Dollar will decline over the coming 12 months, even as they acknowledge the currency’s strong start to 2021 has confounded their expectations.
USD Lowering on the Market
Analysts meanwhile maintain a view that the Pound should benefit “on a tactical basis,” supported by the UK’s quick vaccine rollout, which has helped suppress the risks from new covid variants.
The resilience of the U.S. Dollar was again on display at the start of the final week of March, with the currency on Monday overturning a sizeable loss against the Pound to end the day stronger than where it started.
The Pound-to-Dollar exchange rate (GBP/USD) rallied to as high as 1.3961 before dropping once more and closing over 200 pips lower at 1.3762, resulting in a 0.17% decline the day.
“The US Dollar has had a strong start to 2021, in contrast to our expectations,” says analyst Zack Pandl with Goldman Sachs in New York. “We are sticking with a bearish Dollar outlook for now.”
The Dollar is one of the better performers of 2021, only losing value against the Canadian Dollar, Pound, and Norwegian Krone in the G10 space. Still, here, the losses are less than 1.0% at the time of publication, and further bouts of strength could well see it attain the crown of 2021’s best performing major currency.
Despite the rebound, Goldman Sachs reiterates to clients in a weekly currency market briefing they have not revised their forecast for broad Dollar depreciation for the balance of the year for a few reasons.
One reason is an expectation that the market is being too aggressive in its pricing of interest rate rises at the Federal Reserve.
The Dollar has been bid as markets look to U.S. inflation expectations and conclude that rising inflation over coming months will push the Fed into exiting its quantitative easing program and raising rates to cool prices.
A side effect of higher rates is often a higher Dollar as global investors channel capital into higher-yielding U.S. money market assets.
The U.S. OIS curve, which indicates what the Fed’s market expects, suggests the first hike could come around January 2023, and a 0.7% funds rate could be in place by the end of 2023.
By contrast, Goldman Sachs forecast the first hike only in 2024, in line with the Fed’s official projections.
Another significant driver of U.S. Dollar appreciation in 2021 has been the view that the U.S. economy is set to outpace its global peers, driven by a rapid vaccination program and generous financial support from the Biden administration.
This U.S. exceptionalism can drive Dollar appreciation as global investors buy into U.S.-based assets that would typically be expected to outperform.
But Goldman Sachs 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. If they are correct, the Dollar would understandably benefit less as investors eye alternative global investment opportunities.