Goldman Lowers Dollar Forecasts Versus Euro on Weak U.S. Growth Prospects
Goldman Sachs Group Inc. (GS), the U.S. bank that lost money from trading on only one day in the first quarter, cut its dollar forecasts saying growth in the world’s largest economy is lagging behind other nations.
The greenback will weaken to $1.45 per euro over three months from an earlier projection of $1.40, analysts led by Thomas Stolper in London wrote in a note to clients yesterday The dollar will decline to $1.50 in six months and $1.55 in a year, the analysts forecast. They also cut their three-month target for the currency to 82 yen from 84 yen.
“For the dollar to stabilize or even to rally, investors need to be convinced of the case for additional long-term investments in the U.S.,” the Goldman analysts wrote. “With unemployment still high, fiscal consolidation looming and continued weakness in the real estate sector, the growth outlook remains less compelling in the U.S. than in many other regions or countries.”
The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, has dropped 4.9 percent in 2011 on speculation the Federal Reserve will lag behind most other central banks in raising interest rates. Fed Bank of St. Louis President James Bullard said yesterday officials may keep policy unchanged until late this year.
The dollar traded at $1.4279 per euro as of 10:10 a.m. in New York, having fallen 6.2 percent this year. The currency was at 81.92 yen, up 1 percent since Dec. 31.
Declining inflation expectations have curbed the need to begin withdrawing record stimulus from the economy, Bullard said in an interview yesterday.
“It does take some pressure off the Fed,” said Bullard, who doesn’t vote on monetary policy this year. “Market indicators of inflation have come down. The data has been softer.”
The Fed has kept its target for overnight lending in a range of zero to 0.25 percent since December 2008 to sustain the economic expansion. Central bank rates are 1.25 percent in Europe, 1 percent in Canada, 0.5 percent in the U.K. and 4.75 percent in Australia.
“Interest rate differentials will remain negative for the dollar,” Stolper said in a conference call with investors today. “Growth is becoming slightly slower. There’s decelerating momentum.”
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, has narrowed to 2.37 percentage points from 2.67 percentage points on April 11, the widest in three years.
U.S. unemployment has been more than 8 percent since February 2009. President Barack Obama and lawmakers are debating how to cut spending, raising concern the economy will suffer as government support wanes.
The Fed probably won’t raise borrowing costs until 2013, Goldman Sachs said in its report.
“There is still considerable downside potential” for the dollar, the note said. “We therefore are revising our forecasts to reflect this ongoing trend.”
Goldman Sachs reduced its 12-month prediction for the dollar to 86 yen from 90 yen, and reduced its target versus the pound to $1.85 from $1.79.
The company’s first-quarter trading performance was its best since posting zero days of losses a year ago, according to a filing the New York-based firm made with the Securities and Exchange Commission.
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