Goldman Expects Further Dollar Strength, Says Peak 'Feels Several Quarters Away'

October 21, 2022 6:49 AM EDT
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Goldman Sachs strategist Kamakshya Trivedi expects to witness further U.S. dollar strength over coming months amid continued Fed hikes, as well as a “resilient US growth/inflation mix.”

Historically, the dollar tends to weaken significantly when activity bottoms, in conjunction with the easing Fed. This type of environment would allow the dollar to weaken while global growth and risky asset should recover.

However, the USD peak “still feels severely quarter away,” Trivedi warned the bank’s clients.

“We do not expect the Fed to embark on easing until 2024, and a trough in growth also seems months away. But given the current backdrop of extremely elevated inflation, it may make sense to overweight the experience of the mid-1970s and the mid-1980s, when inflation was similarly high. In those periods, the Dollar appears to have peaked with some Fed easing but US interest rates still near their peak, and with global and US growth still declining rather than at the trough,” Trivedi wrote.

Along these lines, an early USD peak may be possible in the case that Fed rate hikes start coming to an end, or if Fed starts to communicate its pivot intentions. This scenario may play out “at some point in the first half of 2023.”

“We could be through the worst of Europe’s winter recession, a new leadership at the BoJ may gradually start to tighten policy, and China’s zero covid policies may be on their way out, at the same time as a peak in US rates is finally coming into sight alongside some moderation of US inflation and the labor market.”

“But we are not there yet,” Trivedi concluded.

By Senad Karaahmetovic

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Goldman Sachs, Senad Karaahmetovic