Will the US dollar soften with a soft landing? Goldman Sachs adds: Strong stock market returns may limit the decline of the US dollar

According to the Wisdom Financial APP, Goldman Sachs stated that the recent decline in the US dollar index was due to the signal of a rate cut by the Federal Reserve, but if US stocks can bring steady returns, the downward trend of the US dollar may be contained.

The US dollar index fell by 1.7% last week, with losses against the Japanese yen leading to its worst weekly performance since November last year. In addition, the Federal Reserve's clear expectation of a rate cut starting in September led to the decline of the index. The prospect of a rate cut weakened the relative attractiveness of US Treasury yields and suppressed demand for the US dollar, causing both the US dollar index and US Treasury yields to fall together.

The US seems to be moving towards a soft landing, with Goldman Sachs analysts expecting the Federal Reserve to implement a non-recessionary rate cut in September, which will help stabilize the economy without causing a full recession. Some investors are also pursuing trades betting on a soft landing or a weaker US dollar.

In a report last Sunday, Goldman Sachs pointed out that there are "valid reasons" to reduce long positions in the US dollar. Isabella Rosenberg from the bank's macro research department stated, "Global stock markets are strong, combined with improving global economic growth expectations and positive risk sentiment, which is usually negative for the US dollar."

However, Rosenberg noted, "We must remind that when US stocks lead the outstanding performance of global stock markets, the US dollar actually tends to strengthen." Goldman Sachs stated that it found the US dollar to be equally sensitive to stocks and interest rates this year.

The S&P 500 index is one of the best-performing indices this year, rising by about 18%, including reaching a historical closing high near 5667 points after a sell-off earlier this month. The MSCI Global Index has also risen by about 15%. The German DAX index has risen by about 11% this year, and the Japanese Nikkei index has risen by about 14%.

Rosenberg said that the US dollar index has fallen by 0.5% since the beginning of the year, partly due to the recovery of risk sentiment. However, "if the US economy and asset markets continue to provide strong relative stock returns and high risk-free rates to hedge portfolio risks, the US dollar will face a substantial challenge to decline."

Rosenberg stated that the November US election is a key factor determining the direction of the US dollar, but the uncertainty of trade policy and fiscal spending "may still prevent a large amount of funds from flowing out of the US dollar." "Overall, these factors mean that the overvaluation of the US dollar will not be eroded quickly or easily."