The U.S. dollar will experience broad weakness in the coming year as the U.S. economic outlook has deteriorated faster than expected and the Federal Reserve is set to announce additional easing, Goldman Sachs said on Wednesday.
Goldman, which first forecast in August the Fed would return to quantitative easing, said recent comments from Fed officials have become "increasingly concrete" and a move at the central bank's November meeting "now seems highly likely."
"Against this backdrop, we have seen a rapid shift to broad U.S. dollar weakness over the past month," Goldman economists led by Thomas Stolper wrote in a research note.
"In contrast, most other countries (Japan is the main exception given the policy initiatives at the recent BoJ meeting) show little sign of heading in this direction, reinforcing our confidence in the divergence between growth and policy paths between the U.S. and much of the rest of the world, which has been a lynchpin of our more negative medium-term view on the U.S. dollar," the firm said.
Against the euro, the firm expects the dollar to fall to 1.40 in three months, 1.50 in six months and hit 1.55 on a 12-month basis. That compares to old forecasts at 1.22, 1,35, 1.38, respectively.
Goldman emphasized that the weakness in the dollar will be broadly shared. The firm expects the U.S. dollar trade-weighted index (TWI) to decline gradually by about 4.7 percent from current levels over next 12 months, getting quite close to historical lows.
"Importantly, with U.S. dollar weakness shared globally, the trade-weighted impact for other currencies would likely be relatively muted," the firm said.
"Most other countries would experience relatively little appreciation. For example, the euro TWI would only appreciate by about 3.9 percent from current levels, although we project euro/dollar at 1.55 in 12 months."
The dollar tumbled to a 15-year low against the yen and an 8-1/2 month low against a basket of currencies Wednesday data showing U.S. private employers unexpectedly shed jobs in September reinforced the conviction of a Fed move as early as next month.
In the short term, Goldman said positioning, a temporary increase in risk aversion, and lingering concerns about euro zone's sovereign debt issues could provide some boost the dollar.
"We would not be surprised to see euro/dollar dip briefly below 1.30 in the next few weeks," the firm said. "We would see that kind of pullback as a significant opportunity."
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