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The U.S. Dollar may soon give up 2018's gains and turn lower if the latest economic forecasts and currency analysis from Goldman Sachs proves correct.
Goldman Sachs says research shows the U.S. Dollar has a negative relationship with global growth, rising in times when the global economy falters and falling as global growth picks up. This is partly the result of the greenback's "unique" role as the global reserve currency.
"We find that slower US growth tends to result in Dollar strength if it feeds through into global growth expectations and/or market risk conditions, but results in Dollar weakness if these variables remain steady," says Karen Reichgott, an economist at Goldman Sachs in New York.
Goldman forecasts U.S. economic growth will slow from an anticipated 3.2% in 2018 to around 2% next year, while the rest-of-world economy is projected to expand at a steady pace of around 2%. This, along with the bank's analysis of the Dollar's behaviour, suggests the currency is destined to reverse its 2018 rally at some time over the coming quarters.
The anticipated slowdown in the U.S. is projected to result from the boost of President Donald Trump's 2018 tax cuts and reforms fading away, as well as the gradual withdrawal of economic stimulus brought about by the Federal Reserve (Fed) and its interest rate rises. The Fed has raised rates eight times since the end of 2015.
"In an environment in which non-US growth expectations and risk appetite were broadly stable, and the outlook for US growth were to weaken, we should expect Dollar weakness primarily against G3 currencies," says Reichgott. "For investors with a cautious view on both US and non-US growth over the coming year, short USD/JPY positions in particular deserve a careful look."
The Dollar index was 3.5% higher for 2018, at 95.45 Tuesday, while the Pound and Euro were nursing 3.8% losses against the greenback. The risk-sensitive Australian and New Zealand Dollars are sat on declines of 7.8% and 6.7% respectively.
However, the implied bearish view of Reichgott and the Goldman team is at odds with that of strategists at HSBC, who argued last month that the analyst community is in danger of getting "trampled again" next year.
HSBC projects the Dollar will rise in 2019 while the analyst consensus is pointing toward renewed declines by the currency.
"Having failed to forecast the USD bull run of the last five months, the consensus is steadfastly sticking to its view that the USD will weaken, pencilling in roughly a 6% depreciation over the next twelve months," says David Bloom, head of currency strategy at HSBC. "The consensus is no doubt bruised and hurting, and we believe they may be about to get trampled again. This is an unloved USD bull run."
A superior U.S. economic performance has enabled the Federal Reserve to go on raising its interest rate at a time when many other central banks are sat on their hands due to economic underperformance or sub-par inflation.
The Fed is expected to raise its interest rate again in December, while the Bank of England, European Central Bank, Reserve Bank of Australia and Reserve Bank of New Zealand are all expected to stand pat well into 2019.
This goes a long way toward explaining why the U.S. Dollar, after declining 4% in the first-quarter, has triumphed over all other developed world currencies barring the Swiss Franc and Japanese Yen so far this year.
"US rates are high enough to continue to suck in capital into the short end of the curve. Meanwhile, many other G10 central banks would continue to struggle to begin tightening, while those that might hike would do so very slowly," says Bloom.
Bloom and the HSBC team forecast the Dollar will remain on the front foot through the rest of 2018 and at least until the end of 2019. They project the Pound-to-Dollar rate will decline to 1.30 before year-end and remain close to that level through 2019 while the Euro-to-Dollar rate is expected to decline to 1.13 by December before dropping to 1.10 in 2019.
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