Goldman Sachs bullish on dollar as Fed moves toward higher rates

The only Wall Street bank to accurately predict the US dollar's decline last year is betting on the largest rally for the currency in 15 years. Goldman Sachs Group's chief currency strategist, Robin Brooks, says the greenback will appreciate 5 per cent to US$1.25 per euro within six months, putting his estimate among the highest in a survey of more than 60 analysts. Brooks also sees the dollar gaining 6 per cent on a trade-weighted basis during the next 12 months against the Group of 10 currencies. The dollar is enjoying a groundswell of support as the Federal Reserve stops buying bonds and expanding the supply of money as it moves towards its first interest rate increase since 2006. That is boosting the appeal of dollar-denominated assets with yields on treasuries rising relative to the rest of the developed world. "The foreign exchange market has been more skittish than the bond market in terms of pricing in a recovery," Brooks said. "While we certainly believe the Fed is not going to jump the gun on [rate increases], it's also not ideologically dovish that many people have come to fear after all these years of unconventional measures." Goldman, which gets the largest share of revenue from trading among US banks, is even more bullish during the longer term, forecasting the dollar will strengthen to US$1.20 per euro in a year and to parity by late 2017. The median forecast of analysts is US$1.28 by the second quarter of next year and US$1.26 in 2017. After Goldman cut its dollar outlook in September last year, predicting it would weaken to US$1.38 per euro by December and reach US$1.40 this year, the currency ended the year at $1.3743 and depreciated to US$1.3993 on May 8. The European Central Bank had dominated the direction of the euro, which staged a 15 per cent rally after president Mario Draghi said in July 2012 he would do "whatever it takes" to save the currency amid the region's sovereign debt crisis. It has taken less than four months for investors to wipe out more than one-third of that gain since May 8 amid improving growth in the US, the slowest inflation in almost five years, a return to recession in Italy, zero to negative growth in France and Germany, and a conflict between Russia and Ukraine. The ECB unexpectedly cut interest rates on Thursday. The central bank reduced all three of its main interest rates by 10 basis points. The benchmark rate is now 0.05 per cent and the deposit rate minus 0.2 per cent. Draghi also announced plans to "purchase a broad portfolio of simple and transparent securities" and euro-denominated covered bonds. The Fed has kept its benchmark rate at a record-low zero to 0.25 per cent since December 2008, while futures traders saw about a 54 per cent chance the central bank will start raising rates by July next year, data showed. "The last time we saw a meaningful dollar rally was 2001, 2002, and so people sort of think under any circumstance the dollar's weak," said Brooks. "But the price action is gradually changing that psychology." The euro, which dropped to as low as US$1.311 this month, rose back above US$1.3153 on Thursday, a level that is important based on trading patterns and which opens up the possibility of a short-term rebound, according to Bank of America Corp. "The break above US$1.3153 exposes US$1.322. If that breaks, that's the first indication that this euro downtrend we've been in is starting to show signs of reversing," said MacNeil Curry, Bank of America Merrill Lynch's head of technical strategy. "We see a dollar pullback as being corrective. Once it's run its course, we think the larger euro downtrend will resume, targeting $1.26, $1.27." The dollar would probably repeat its rally against its peers 15 years ago, said Jens Nordvig, a managing director of currency research at Nomura Holdings. "What we're looking at now is really like the 1999, 2000 cycle. It's the level of rates compared with the other majors," Nordvig said. "When we think about the current cycle here, we know US rates are rising, but it's also the relative level of rates." Treasury 10-year notes yield 1.47 percentage points more than similar maturity debt issued by Germany, the largest economy among the 18 euro nations. Last year, the spread was as narrow as 0.25 per cent. "The dollar has done a lot of catching up with rate differentials and we expect it to do more," Brooks said. "The currency market is waking up, and the dollar can really outperform."

Goldman Sachs bullish on dollar as Fed moves toward higher rates

Greenback enjoys groundswell of support as Fed moves towards higher borrowing costs, with Goldman predicting parity with the euro by 2017