- Fed, ECB December meetings may result in policy divergence
- Greenback is near two-month high versus common currency
Goldman Sachs Group Inc. sees its long-standing call for the dollar to reach parity with the euro coming true as soon as December as the Federal Reserve and European Central Bank move toward divergent monetary-policy actions.
The U.S. central bank emphasized on Wednesday it’ll consider raising interest rates on Dec. 16, a week after the ECB hinted additional stimulus may arrive as soon as its Dec. 3 policy meeting. That’s bringing euro-dollar parity back into focus after the dollar’s ascent stalled at a 12-year high in March.
"After the painful period since March, it will take time for markets to trust this message once again," Robin Brooks, Goldman Sachs’s New York-based chief currency strategist, wrote in a report. "But we think they will, which should take euro-dollar down to $1.05 ahead of Dec. 3, and we picture ending the year at parity."
The dollar slipped 0.4 percent to $1.0968 Thursday in New York, after rallying 1.2 percent on Wednesday. It rallied to $1.0458 on March 16 after beginning the year at $1.2109.
Goldman Sachs’s official three-month dollar projection is $1.02 per euro, the most bullish when compared with year-end currency forecasts compiled by Bloomberg.
For much of past year until March, the diverging paths of the U.S. and the rest of the world prompted strategists to call for a multi-year dollar appreciation cycle. Then it became increasingly clear that even the biggest economy couldn’t escape the ripple effects of the slowdown around it.
The lack of follow-through in the dollar’s rally caused most banks to lower their forecasts. In a sign that the bullish consensus is fading, no other bank is now calling for the dollar to rally to parity with the euro by year-end, compared with 14 at the start of the quarter, according to Bloomberg data.
While Goldman Sachs stuck with its bullish calls it first made in January, Morgan Stanley, Bank of America Corp. and Citigroup Inc. are among banks that have lowered their dollar forecasts against the euro during the past two months.
Fed policy makers said Wednesday the economy is still expanding at a “moderate” pace, giving themselves the option to tighten policy at their next meeting in December. Futures prices showed an increased probability of a December rate rise as the central bank also removed a line from September’s statement saying that global economic and financial developments “may restrain economic activity somewhat.”
State Street Corp., the world’s second-largest custody bank, said the stars may finally be aligning for the dollar rally to resume as the Fed and ECB moving in different directions.
“If we have those two events happening at the same, we’ll certainly move closer to parity," Steven Meier, the Boston-based head of cash, currency and fixed income at the money-management unit of State Street Corp., which oversees $2.4 trillion. “The divergence of monetary policies will certainly drive the dollar higher against the euro.”