After the high-profile rate cut by the Federal Reserve, Goldman Sachs expects the US dollar to weaken across the board

After the Federal Reserve cut interest rates significantly, Goldman Sachs lowered its forecasts for the US dollar against multiple currencies.

Goldman Sachs expects the US dollar to gradually weaken as the attractiveness of the dollar is undermined by the decline in US Treasury yields. In turn, the bank also raised its forecasts for several major currency exchange rates, including the pound, euro, yen, and renminbi.

Before Goldman Sachs released its new forecasts, the Federal Reserve cut interest rates by 50 basis points last week, boldly initiating a loose cycle aimed at boosting the US labor market. The bank stated that this decision indicates that policymakers are more willing to actively address economic downturns than other countries.

Goldman Sachs strategists, including Kamakshya Trivedi, wrote in a report, "Over time, rate cuts should lead to 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 rapidly or easily, but the threshold has been lowered slightly."

With their updated view on the US dollar, Goldman Sachs is now more bullish on the pound, raising its target for the GBP/USD exchange rate for the next 12 months from the previous 1.32 to 1.40, a level the currency pair has not touched since 2021 and one of the highest forecasts on Wall Street.

Goldman Sachs expects the pound to rise to 1.40 against the US dollar in the next 12 months

Goldman Sachs' bullish view on the pound is based on the prospect of the Bank of England being unwilling to accelerate the pace of rate cuts, while the Federal Reserve and the European Central Bank have made larger rate cuts. Despite many strategists and investors suggesting that the Bank of England will eventually need to catch up in rate cuts, Goldman Sachs states that the UK economy remains robust.

The strategists wrote, "Support for the pound comes from both its risk beta coefficient and the robust growth momentum of the UK economy and the patient Bank of England. The market has already digested the risks of a US economic downturn, benefiting risk assets and pro-cyclical currencies like the pound."

Goldman Sachs also raised its forecast for the euro, currently expecting the euro to rise to 1.15 against the US dollar in 12 months, rather than falling to 1.08. The bank also expects that within the same time frame, the yen will rise to 140 against the US dollar, compared to the previous forecast of 150. Meanwhile, the renminbi is expected to reach 7.25 against the US dollar, down from the previous forecast of 7.40.

Goldman Sachs expects a broad-based weakening of the US dollar, in sharp contrast to the view of Deutsche Bank strategists, who stated that the Federal Reserve's rate cuts have had little impact on shaking the dollar's high-yield status.

George Saravelos, head of foreign exchange strategy at Deutsche Bank, wrote in a report, "We believe that the pricing around the Federal Reserve's rate cut path is overly dovish, and the market underestimates the upside risks around a Trump victory for the dollar, so we tend to buy the dollar."