Goldman Sachs: Global rate cut cycle bullish for the US dollar

Goldman Sachs analyst said that the downside risk to the US dollar from the Fed's imminent rate cut is limited as other central banks are also easing policies.

The bank's foreign exchange analyst Isabella Rosenberg wrote in a report to clients that in fact, this synchronous rate-cutting cycle is usually associated with a stronger US dollar. She reached this conclusion based on an analysis of rate cuts and policy coordination among developed countries since 1995.

She wrote, "If most central banks ease monetary policy together, we can expect this to limit the impact of the Fed's easing on the US dollar. While the market expects the Fed to pivot more quickly, we still believe that if the Fed gives other central banks room to do so, they will further ease policy."

Market expectations are that the Fed will cut rates for the first time next week, joining central banks such as the European Central Bank and the Bank of England that have already begun easing policies. As traders prepare for the Fed's first rate cut, the US dollar has been under pressure recently. In theory, a Fed rate cut would reduce the incentive for investors to buy US Treasuries, thereby weakening demand for the US dollar.

Rosenberg stated that this dynamic only occurs when the Fed is not in sync with other major central banks, which typically leads to a weaker or stable US dollar. However, in the current situation, "US interest rates are still relatively high, and other countries' currencies are falling, which to some extent weakens the motivation to sell the dollar and buy assets elsewhere."

"Given the US dollar's status as a safe-haven currency, this global synchronized rate cut may also signal concerns about economic growth, thereby boosting the US dollar."

She said, "Explaining the performance of the US dollar with a single variable—this time the Fed's policy direction—is usually not very successful. Clearly, the relative background of foreign exchange is more important."