Goldman Says Don’t Bet on Dollar Selloff as Dovish Fed Priced In

  • Policy makers talk up shallower path for interest rates
  • Yet traders already pricing in just one hike over next 3 years

Goldman Sachs Group Inc. is telling clients not to fret about a sharp selloff in the dollar as the Federal Reserve re-examines the path of interest rates. The market is already far more dovish than policy makers, the bank says.

The greenback weakened for a second week after minutes of the Fed’s July meeting showed officials are divided on the timing of the next rate increase. San Francisco Fed President John Williams this week was the latest in a chorus of officials to call for a rethink of medium-term interest-rate expectations and monetary policy broadly as years of accommodative measures fail to spur growth and inflation. He echoed similar calls from St. Louis Fed President James Bullard just weeks earlier.

Yet markets continue to be a step ahead of policy makers, Goldman Sachs analysts Robin Brooks and Michael Cahill wrote Friday, limiting the prospects for a tumble in the dollar. Derivatives traders are fully pricing in just one rate hike over the next three years, overnight index swaps show. The next key policy signal will come when Fed Chair Janet Yellen speaks Aug. 26 in Jackson Hole, Wyoming.

"Many are fearful the Fed could engineer a painful squeeze with US dollar selling off sharply," wrote the New York-based analysts. "The Fed has few tools to make the U.S. dollar go down from here. Rates markets at this point price very little in the way of Fed tightening over the medium term."

The Bloomberg Dollar Spot Index, which measures the U.S. currency against 10 peers, fell 0.9 percent this week, extending its decline this year to 5.3 percent. The greenback weakened 1.1 percent to 100.22 yen and tumbled 1.4 percent to $1.13 per euro at the close on Friday.

The U.S. currency is projected to strengthen to $1.09 per euro and 105 yen by year-end, according to the median forecast of analysts in surveys conducted by Bloomberg.

The Fed in March reduced the number of expected rate hikes this year to two, from four. In June six officials forecast just one hike for 2016, compared with one person in March.

The probability of a U.S. rate increase by year-end climbed to about 51 percent this week, according to data compiled by Bloomberg based on fed fund futures. The chance of a move at the next meeting on Sept. 20-21 is 22 percent. The central bank raised its target to a range of 0.25 percent to 0.5 percent in December, the first increase since 2006.

“The Fed can put serious obstacles in the way of further dollar appreciation,” Brooks and Cahill wrote. “But from current levels it cannot make the dollar go down in any material manner.”

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