Goldman Sachs: Limited Time to Bet Against the Dollar

Happy CPI day to all who observe! Let’s dive into this critical report.

If inflation meets economists’ expectations, there might be a fleeting chance to bet against the U.S. dollar, according to Karen Reichgott Fishman, senior currency strategist at Goldman Sachs.

After hitting 2023 highs, the dollar has been on a decline and could weaken further. Fishman notes, “The tactical backdrop looks increasingly friendly for risk and negative for the dollar.”

This year’s dollar movements have largely been influenced by interest rate expectations, as illustrated in a chart showing the dollar versus a weighted average of the rate differential in 5-year securities of major counterparts.

Goldman Sachs

Comparing the dollar’s returns against major rivals reveals this trend: it has surged against the Japanese yen (USDJPY), where rate differentials have widened, and declined against the British pound (GBPUSD), with minimal changes.

Rates are not the only factor behind the dollar’s strength. Fishman points out that the second-largest contributor to the dollar’s gains has been the Mexican peso (USDMXN), with the outlook shifting after Mexico’s landslide election.

Fishman highlights the positive correlation between stocks and bonds for most of this year, which typically aligns with significant dollar movements. When stocks and bonds rise together, the dollar often struggles. “This makes it all the more surprising to see the dollar simultaneously hit new highs and reinforces the scope for a tactical sell-off,” she adds.

Currently, there appears to be a narrow window for further relief in U.S. yields and gains for U.S. equities, with few major headwinds expected until mega-cap tech earnings at the end of July. In such an environment, the dollar usually weakens against most currencies and is a good candidate for funding emerging-market carry trades.

However, Fishman emphasizes that the dollar’s bullish trend is likely to resume in the second half. Ahead of the U.S. election, potential broader tariffs, especially against the Chinese yuan and other Asian currencies, pose an upside risk. This is in addition to the anticipated limited cross-border investment flows leading up to the election.

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