Goldman Cuts Dollar Forecasts Against the Euro, Yen on Weaker U.S. Growth
July 14 (Bloomberg) -- Lakshman Achuthan, managing director of the Economic Cycle Research Institute, talks with Bloomberg's Lori Rothman about Federal Reserve monetary policy and the outlook for the U.S. economy. Fed officials, in their minutes released today, saw no need to boost stimulus to the economy while trimming their forecasts for growth and noting that risks to the recovery had increased, minutes of the June Federal Open Market Committee meeting showed. Bloomberg's Michael McKee and Richard Yamarone also speak. (Source: Bloomberg)
Goldman Sachs Group Inc. said the dollar will weaken against the euro by January as U.S. growth slows, marking the bank’s second reversal in two months after it forecast in June the greenback would surge to a seven-year high.
Europe’s single currency will fall to $1.22 in three months before gaining to $1.35 in six months and $1.38 in a year, according to an e-mailed research note dated July 14. The bank raised its outlook for the yen, forecasting it to reach the highest level since 1995 versus the dollar, citing lower expectations for interest rate increases by the Federal Reserve or currency intervention by Japanese officials.
“Weaker U.S. growth, reasonably solid euro-zone macro data and less political/fiscal disruptions than feared have been a feature of the past few weeks,” wrote analysts including Thomas Stolper, an economist in London for Goldman. “This weakening in U.S. activity is the beginning of a period of sub-trend growth, spanning about four quarters until the second half of 2011.”
The euro traded at $1.2794 as of 10:20 a.m. in London from $1.2743 yesterday in New York. It traded at 1.3404 Swiss francs from 1.3414. The dollar was at 88.03 yen from 88.41 yesterday.
Minutes of the Federal Reserve’s June 23 meeting showed policy makers were concerned about unemployment and deflation in the world’s largest economy. If the outlook worsened, the Federal Open Market Committee would need to consider whether additional stimulus was appropriate, according to the minutes, which were released yesterday.
‘Notably Lower’
Goldman analysts said the euro may weaken this quarter as popularity falters in some European governments and markets await the impact of stress tests on 91 of the region’s banks due July 23. The euro will move “notably lower” to 1.27 Swiss francs over three months on safe-haven flows out of the euro zone, according to the note.
“We may need a few more months with strong activity data before we are willing to sound the all clear on European fiscal issues,” the analysts wrote.
The bank’s six-month outlook takes it back to the position it held before June 9, when it predicted the common currency would drop to a seven-year low of $1.15 over three and six months from a $1.35 forecast earlier.
The bank expects the euro will recover to 1.30 francs and then 1.33 francs over six months and a year.
Yen Strength
Goldman expects the dollar will breach this year’s low versus Japan’s currency, sliding to as weak as 83 yen in six months from an earlier call for it to trade at 94 yen. The greenback will buy 85 yen in three months and 90 yen in 12 months, compared to earlier predictions for 92 and 98 respectively.
“The market is still pricing in too much for U.S. rates through end-2011 and as this is re-priced lower, it will likely push dollar-yen lower as well,” the analysts wrote. “The Japanese economy has been able to recover much more quickly than expected, helped by strong exports to the rest of Asia.”
Bank of Japan policy makers today kept interest rates unchanged at 0.1 percent and raised their growth forecast for the year ending March 2011 to 2.6 percent from 1.8 percent estimated in April. They pared next year’s expected growth rate to 1.9 percent from 2 percent previously.
Fed Rates
The Fed won’t raise its target rate until the second quarter of 2011, according to the median forecast in a Bloomberg News survey of economists. Both central banks have held rates near zero since December 2008.
Concern among policy makers that a strong yen will hurt exporters and dent the nation’s economic recovery is unlikely to result in intervention in the currency markets, Goldman said. Moves to sell the yen to limit gains may cause “frictions” with a U.S. administration focused on promoting currency flexibility in Asia, particularly China, the analysts wrote.
“Any sharp move in dollar-yen would generate verbal intervention,” the analysts said. “We don’t expect the administration to actively prevent yen appreciation for the time being.”
To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net
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