Interview
What’s Ahead for the U.S. Dollar?
- Strategy Shift: Goldman Sachs Research removed its "dollar short" trade recommendation after Q1 2021 performance, as short positions against commodity currencies (e.g., Canadian dollar) remained flat despite the firm's long-term bearish structural thesis.
- Rate Stabilization: The firm noted that five-year U.S. Treasury yields have stabilized or declined slightly in the month following the Q1 data surge, creating potential volatility conditions favorable for new dollar short opportunities.
- Euro Outlook: Zach Pandel, Co-Head of Global Foreign Exchange Strategy, identified the euro as the primary candidate for appreciation against the dollar over the next several months.
- Forecast: The firm has set a 12-month target of 1.28 for the euro-dollar exchange rate.
- Rationale: This view is based on stabilizing COVID-19 conditions, accelerating vaccinations, and upgraded forecasts for European equity returns relative to the U.S.
- Policy Driver: Potential adjustments to the European Central Bank's bond purchase program later in the summer are expected to exert upward pressure on European interest rates.
- Reserve Currency Trends: The dollar's share of global foreign exchange reserves is projected to continue a gradual decline to its lowest level since 1995, driven by competition from the euro and Chinese yuan.
- European Competition: The emergence of a common European bond market, supported by COVID-19 recovery fund issuance starting in July, is expected to attract sovereign investors.
- Chinese Competition: China's financial opening, including inclusion in major global bond indices and high real interest rates, is driving significant portfolio flows into Chinese fixed income.
- U.S. Tax Policy Impact: The Biden administration's proposed infrastructure plan, which includes raising the corporate tax rate to 28%, is forecast to negatively impact the dollar.
- Earnings Estimate: Goldman Sachs portfolio strategists estimate the tax hike would reduce S&P 500 earnings per share for the next fiscal year by approximately 9%.
- Capital Flow Risk: Anticipated underperformance of U.S. equities relative to non-U.S. markets may trigger capital outflows in search of higher returns, further exerting downward pressure on the dollar.
- Market Data Context: The discussion notes that despite strong U.S. growth data and inflation upside surprises, the market has repriced expectations for the Federal Reserve, dampening immediate dollar strength.