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Goldman Sachs' foreign currency team has stated that the recent decision by the Federal Reserve (Fed) to cut interest rates by half a percentage point is likely to extend the strength of the US dollar (USD). The Fed's action is seen as a strategy to reduce economic and financial volatility, which, in turn, may help mitigate recession risks that have become apparent in foreign exchange (FX) markets over recent months.
Federal Reserve Actions and Dollar Performance
The Federal Open Market Committee's (FOMC) decision reflects a proactive approach to managing economic uncertainty. As highlighted by Goldman, the broad US dollar has only slipped around 2% since the end of June and remains flat compared to last year. In contrast, the dollar index—heavily weighted towards safer currencies like the Japanese yen (JPY) and the euro (EUR)—has seen a nearly 5% decline.
Goldman’s currency strategists are reassessing their previous stance that the US dollar's depreciation in recent months was a natural consequence of anticipated Fed cuts. They suggest that this trend may reverse if the Fed fails to deliver on rate cuts while the US economy performs better than expected.
Labor Market and Economic Outlook
Despite these observations, Goldman Sachs cautions that with the slowdown in the labor market, the Fed's readiness to respond more aggressively to economic risks compared to its global counterparts weakens the argument for a complete reset of the dollar's value.
Looking forward, Goldman’s strategists maintain expectations that the US economy will continue to outperform while regions such as China and the euro area may lag behind. The outlook for US real returns remains favorable compared to other markets and the previous economic cycle.
Revised Currency Forecasts
Among the updated forecasts, Goldman anticipates the Australian dollar (AUD) will appreciate to US69¢ over the next three months, up from a prior prediction of US63¢. As of Saturday’s trading day in New York, the Aussie was valued at US68.01¢. Goldman projects the AUD will reach US71¢ in six months and US72¢ within a year.
Despite the optimistic short-term outlook for the Australian dollar, Goldman indicates that it still expects a gradual decline in the US dollar over time. However, this decline is anticipated to be uneven, with the dollar's high valuation unlikely to diminish swiftly or easily.
Bottomline
Goldman Sachs' analysis underscores the resilience of the US dollar amid recent monetary policy changes by the Federal Reserve. While there are adjustments in currency forecasts, particularly for the Australian dollar, the overall sentiment suggests that the USD will maintain its strength in the near term, driven by a robust US economic outlook compared to other global economies. Investors will be closely monitoring these developments as they navigate the evolving landscape of foreign exchange markets.
