Goldman Sachs Cools on Long-Dollar Trades as Reflation Wanes

Goldman Sachs Group Inc. has finally dumped the dollar.

The U.S. investment bank closed one of its top trade recommendations for 2017 -- long-dollar positioning against the euro, the sterling, and the Chinese yuan -- citing a slowdown in the reflationary momentum in the U.S. economy.

“In recent years we have generally maintained a bullish dollar view, and the greenback still has a number of things going for it, including a healthy domestic economy, an active central bank, and lower political uncertainty compared with the U.K. and euro area,” Goldman economist Zach Pandl wrote in a client note. “However, a number of fundamentals have changed on the margin, such that the long-dollar story no longer warrants a place among our ‘Top Trades.”’

The Trump administration’s preference for a weaker greenback, an uptick in global growth -- tempering the outperformance of the U.S. economy -- and the Federal Reserve’s less-hawkish-than-expected posture all suggest the greenback is unlikely to stage an advance anytime soon, Pandl said.

Goldman is tempering its enthusiasm for the trade -- first touted Nov. 17 as optimism over the outlook for the U.S. economy surged this year -- amid weaker-than-expected U.S. data. The latter include April Empire Manufacturing on Monday and March consumer prices and retail sales on April 14. The dollar breached a key technical support level this week as the 10-year Treasury yield hit the lowest level since Nov. 17.

A weaker-than-forecast outlook for the dollar on a trade-weighted basis has also spurred Goldman to review its currency forecasts across the board, while also tempering its outlook for U.S. inflation.

“While we have not changed our view that an acceleration in U.S. inflation will ultimately be seen, reflecting a closing output gap and still accommodative monetary and financial conditions, we would stay on the sidelines for now on the back of the increase in uncertainty over the macro and risk outlook,” Pandl wrote.

A lack of progress on tax reform and infrastructure spending combined with relatively dovish market sentiment on the outlook for Fed rate hikes will continue to weigh on the currency, Goldman concludes.

“After 2013’s ‘taper tantrum,’ policy makers will likely want to move carefully around the start of balance sheet normalization, and will probably take at least a brief pause from funds rate hikes when that process gets underway,” Pandl wrote. “As a result, the dollar has not benefited as much as we might have thought from hawkish communication about the funds rate in recent months.”