Goldman Sachs Predicts Room for US Dollar Strength, Challenging Market 

Goldman Sachs Group Inc. is suggesting that the US dollar has more potential for strength than what the market is currently estimating. Analysts at the firm, Michael Cahill and Lexi Kanter, have pointed out that credit conditions in the US have not tightened as much as initially feared, while economic activity in Europe and China has fallen short of earlier robust expectations. This analysis, outlined in a recent note, indicates that the dollar’s near-term prospects for appreciation may be underestimated by the market. Despite widespread assumptions of dollar depreciation, Goldman Sachs believes that the overall decline may be more limited than commonly believed.

Factors Supporting Dollar Strength:

In May, a gauge of the dollar’s strength has already risen by over 1%, primarily driven by adjustments in market expectations for the timing of Federal Reserve rate cuts. Additionally, the ongoing debt-ceiling standoff has further bolstered the currency’s appeal as a safe haven. This follows two months of depreciation for the US dollar. The analysis by Goldman Sachs suggests that these recent trends may not necessarily mark a long-term reversal, but rather a temporary adjustment. The analysts argue that credit conditions in the US, which have not tightened significantly, combined with disappointing economic activity in Europe and China, contribute to an environment that supports the potential for further dollar strength.

Limited Dollar Depreciation Outlook:

Goldman Sachs suggests that the depreciation of the US dollar throughout the year may be more restrained than commonly believed. The analysts anticipate that the dollar’s deceleration from its peak will occur gradually, with intermittent obstacles along the way. They argue that the limited slack in the US economy will prompt policymakers to maintain a cautious approach, thereby preventing significant depreciation. Historically, dollar depreciation has been associated with strong growth in the rest of the world rather than weak growth in the US. Until a suitable contender emerges, such as the euro, the dollar’s strength may persist.

The Euro’s Prospects and Policy Divergence:

Goldman Sachs maintains a cautious outlook on the euro and does not foresee sufficient factors to support its continued appreciation against the US dollar. The analysts argue that the policy paths of the Federal Reserve and the European Central Bank are not significantly divergent, and there are no compelling reasons to expect the euro to assume a stronger position. Consequently, Goldman Sachs maintains its forecast for the euro to reach 1.10 per dollar by the end of 2023. The euro experienced a decline of 0.4% against the dollar on Tuesday, following two days of gains.

Conclusion:

Goldman Sachs Group Inc. contends that the US dollar has the potential for further appreciation, contrary to market expectations. The analysis suggests that credit conditions in the US and underwhelming economic activity in Europe and China create an environment conducive to dollar strength in the near term. While the recent depreciation of the dollar may indicate a temporary adjustment, Goldman Sachs emphasizes that overall depreciation for the year may be more limited than commonly believed. The euro, on the other hand, lacks sufficient catalysts to sustain its appreciation against the dollar. As market dynamics continue to evolve, the future trajectory of the US dollar remains a topic of keen interest and speculation for investors and market participants alike.

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