As the Federal Reserve begins a loose monetary policy cycle, Goldman Sachs lowers its expectations for the US dollar

According to the Zhitong Finance and Economics APP, after the Federal Reserve significantly cut interest rates, Goldman Sachs lowered its expectations for the US dollar against multiple currencies. The bank expects that as the attractiveness of the US dollar weakens with the decline in US Treasury yields, the dollar will gradually weaken. Subsequently, the bank raised its expectations for several major currencies such as the Euro, Pound, and Yen.

Last week, the Federal Reserve initiated a loose cycle by cutting interest rates by 50 basis points, aiming to boost the US labor market. The bank stated that this decision indicates that US policymakers are more willing to actively address economic downturns compared to other countries.

Goldman Sachs strategists, including Kamakshya Trivedi, wrote in a report: "Over time, this balance should mean a weaker dollar, but we still expect this to be a gradual and uneven process." "We also still believe that the overvaluation of the dollar will not be eroded quickly or easily, but the threshold has been lowered slightly."

With the new view on the US dollar, Goldman Sachs is now more bullish on the Pound, expecting it to rise from the previous $1.32 to $1.40 in 12 months. This level was last seen in 2021 and is one of the highest forecast levels on Wall Street.

The bank's view on the Pound is mainly based on the larger interest rate cuts by the US and European central banks, while the Bank of England is not willing to accelerate its rate cuts. Despite many strategists and investors suggesting that the Bank of England will eventually need to catch up with rate cuts, Goldman Sachs believes that the UK's economic growth remains strong.

Strategists wrote, "Support for the Pound comes from risk beta values, robust growth momentum, and a patient Bank of England. The market has already digested the risks of a US economic recession, benefiting risk assets and pro-cyclical currencies like the Pound."

In addition, the bank also raised its estimate for the Euro, now expecting it to rise to $1.15 in 12 months, instead of $1.08. The institution predicts that during the same period, the Yen exchange rate will rise to 140 Yen to 1 US dollar, instead of the previous forecast of 150 Yen to 1 US dollar.

Goldman Sachs also raised its expectations for the Renminbi but still believes the Renminbi will weaken from its current level. The bank expects the Renminbi to rise from the previous 7.40 to 7.25 against the US dollar in 12 months.

Goldman's forecast for a comprehensive weakening of the US dollar contrasts sharply with Deutsche Bank strategists, who believe that the Federal Reserve's rate cuts will not have a significant impact on shaking the US dollar's high-yield status.

Deutsche Bank's foreign exchange strategist, led by George Saravelos, wrote in a report: "We believe the Federal Reserve's pricing is too mild, and the market underestimates the positive risks around a Trump victory for the dollar, so we prefer to buy the dollar."