After the Federal Reserve's large interest rate cut, Goldman Sachs shorted the US dollar, while the expected exchange rates for the British pound, euro, Japanese yen, and Chinese yuan were collectively raised

Last week, the Federal Reserve initiated this round of easing with a significant 50 basis point rate cut, prompting Goldman Sachs to be bearish on the US dollar. In a recent report, Goldman Sachs lowered its forecasts for the dollar against a range of currencies and raised expectations for several other major currencies including the euro, pound, and yen.

The report by Kamakshya Trivedi and other Goldman Sachs strategists mentioned above believes that the decision to cut rates significantly last week reflects the Fed's willingness to address economic downturn in a bolder way than other central banks. It is expected that as yields lose attractiveness, the dollar will gradually weaken. The report stated:

"Over time, this balance should lead to a softer dollar, but we still expect this to be a gradual and uneven process. We also continue to believe that the overvaluation of the dollar will not be eroded quickly or easily, but the threshold has been lowered somewhat."

Based on the latest forecasts for the dollar, Goldman Sachs, which has been bullish on the pound since the beginning of the year, is now even more bullish, expecting the pound to rise to 1.40 against the dollar within 12 months, up nearly 6.1% from the previous expectation of 1.32. If the forecast is correct, the pound will reach 1.40 for the first time since 2021, also the highest expectation for the pound by Wall Street institutions.

Goldman Sachs strategists stated that the support for the pound comes from both its risk beta coefficient and the strong growth momentum and patient Bank of England. The market has already digested the risks of a US economic recession, benefiting risk assets like the pound and pro-cyclical currencies.

For the euro, Goldman Sachs raised its 12-month forecast for the euro against the dollar to 1.15, up from the previous expectation of a depreciation to 1.08, an increase of nearly 6.5%. Goldman also raised its forecast for the yen against the dollar to 140 within the same period, up nearly 6.7% from the previous forecast of 150.

Goldman also raised its forecast for the yuan against the dollar, expecting the yuan to rise to 7.25 within the next 12 months, down from 7.40 previously, an increase of about 2%.

The bearish view on the dollar from Goldman Sachs contrasts with the recent views of Deutsche Bank strategists. Deutsche Bank believes that the Fed's rate cuts have little impact on shaking the dollar's high-yielding status. George Saravelos and other foreign exchange strategists at Deutsche Bank wrote in a report that they believe the market is too dovish on the Fed, underestimating the positive risks of a Trump victory on the dollar, hence Deutsche Bank favors buying the dollar.

Prior to the Fed's rate cut last week, an article from Wall Street News earlier this month mentioned that according to Goldman Sachs analysis, the seven rate-cut cycles from 1995 to 2020 can be divided into "coordinated" and "uncoordinated" categories, meaning if at least four other G10 central banks start cutting rates within 6 months of the Fed, the cycle is considered coordinated. Otherwise, it is considered uncoordinated. Goldman Sachs found that coordinated rate-cut cycles are usually more favorable to the dollar, while uncoordinated cycles are unfavorable to the dollar. Over the past three months, several G10 central banks have begun to ease monetary policy. Goldman Sachs believes that this could form a relatively coordinated global rate-cut cycle, helping to alleviate the downward pressure on the dollar from the Fed's rate cuts However, Goldman Sachs pointed out that the US dollar has a safe-haven status, and the performance of the US dollar depends on the conditions of other global economies when the US economic growth slows down. For example, at the end of 2007 to the beginning of 2008, the US economy slowed down, but the US dollar weakened. This was because at that time, the economic growth in other regions of the world was relatively strong, and the market believed that the economic issues in the US were mainly domestic and did not spread to other regions