Goldman Says Dollar Surge Far From Over as Traders Misprice Fed

Updated on
  • Bank says market is underestimating path of rate increases
  • Deutsche Bank sees higher interest rates, greenback gains

Is the Fed Trying to Prime Market for a Hike?

Goldman Sachs Group Inc. is holding fast to its bullish-dollar call, undeterred by plunging expectations for a Federal Reserve interest-rate increase.

A gauge of the U.S. currency was near the strongest level since August as U.S. yield levels bolstered the greenback’s allure versus major peers even as futures showed reduced odds of a Fed rate hike next week. The dollar advanced against the yen after some Bank of Japan officials were reported to have said they still favor stepping up purchases of government bonds.

Goldman, which has been bullish on the greenback since 2014, remains wedded to its call even though the dollar has slipped 3.9 percent against its major peers this year as traders pared back expectations for the pace of Fed interest-rate increases. The bank expects the currency to strengthen by 15 percent based on the firm’s forecast for a three-percentage-point rate increase during a Fed tightening cycle that will continue through 2019, strategists led by Robin Brooks in New York wrote in a note published Tuesday. Derivatives traders are pricing in roughly 50 basis points of tightening during the same period, data compiled by Bloomberg show.

“Given how dovish market pricing is, the hurdle for the dollar to rally is low, while the hurdle for it to fall in any meaningful way is substantial,” Brooks wrote. The bank recommends buying the dollar versus the Canadian dollar and the yen.

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, fell 0.1 percent at 11:40 a.m. in New York. It climbed 0.7 percent Tuesday to close at the highest level since Aug. 31. The U.S. currency fell 0.4 percent to $1.1265 per euro and dropped 0.1 percent to 102.44 yen.

Futures indicated a 22 percent chance of an interest-rate increase this month, down from 30 percent last week, according to data compiled by Bloomberg, based on the assumption that the effective fed funds rate will trade at the middle of the new FOMC target range after the next increase.The probability of a move by year-end was 54 percent.

If the Fed hikes rates once this year and twice in 2017, the dollar will strengthen, said Alan Ruskin, global co-head of foreign-exchange research in New York at Deutsche Bank AG, in an interview with Bloomberg Television.

"When you look at at least the past year and you do some more formal regression analysis, it would suggest you get maybe 5 percent to maximum 10 percent gains against the euro, against the Aussie and the pound -- moderate gains, not dramatic, but solid gains none-the-less," Ruskin said.

The greenback will strengthen to $1.09 per euro and 105 yen by the end of the year, according to the median forecasts in a Bloomberg survey of analysts.