While the Fed seems trapped in the inflation data unconvincing, there is room for a rise in the dollar.
The greenback is more than ever at the center of investors’ attention now that the divergence between the Federal Reserve and other major central banks appears to materialize in June.
With the ECB rate cut and probably BoE and a cost of money still unchanged – at high levels – in the USA, the Fotex movements promise to be interesting. The dollar can still rise, according to Goldman Sanchs. With inevitable consequences.
Is Dollar Strength Here to Stay? Forecasts
The dollar could stay stronger for longer whether the Federal Reserve will hold interest rates steady while other nations opt for lower borrowing costs, according to Goldman Sachs Group Inc.
“If the Fed remained stable, but more banks decided to proceed with domestic easing rather than wait for the US central bank to intervene, then policy divergence would likely keep the dollar stronger for longer”, they wrote in a note to customers. Analysts expect interest rate cuts in June for Canada, the United Kingdom and the euro area.
This year the dollar appreciated versus all other Group of 10 currencies, with the Bloomberg index tracking the strength of the greenback up almost 3%.
Continued weakening of US data over the next three to five months would allow the central bank to consider reducing borrowing costs in late 2024, Federal Reserve Governor Christopher Waller said on Tuesday. Meanwhile, however, European Central Bank President Christine Lagarde has indicated that a cut is likely next month, with the rapid rise in consumer price growth now largely contained. The divergence is therefore about to be sanctioned. With lower rates, the euro depreciates.
“Where macro and potential policy divergence has been most evident, policymakers have kept an eye on Fed changes to limit the magnitude of currency volatility”, analysts wrote. But if central banks around the world started cutting “relatively earlier and more aggressively” Compared to the Fed, the greenback is destined to appreciate. In this scenario, the dollar’s strength will be eroded only very slowly according to analysts.
Will the strong dollar send these countries into crisis?
Pay maximum attention to the various consequences on the persistence of a strong dollar.
While at the beginning of the year the strong dollar was associated with robust growth, it now risks becoming more correlated with one aggressive policy or high inflation, said Trivedi, head of global currency, rates and emerging market strategy research at Goldman. This mix represents a completely new challenge for i emerging markets.
“If we see this kind of more sinister dollar strength, we will see more weakness in more fragile parts of the world”, Trivedi said. The focus is on emerging markets, where sensitivity is quite high to dollar strength and this can therefore influence domestic policy settings very quickly.
Trivedi said countries including Indonesia, South Korea and China could come under greater pressure, and that the impact would be felt widely, citing the rate decisions last week in Mexico and Brazil. Mexico left rates unchanged, while Brazil slowed the pace of its easing cycle by up to a quarter of a point.
