Yahoo Finance The dollar will keep gaining strength amid stable US growth and the absence of any alternative among rival currencies, Goldman Sachs says
The strength of the US dollar should continue as rival currencies fail to present an attractive alternative, according to Goldman Sachs.
The bank highlighted that solid economic growth in the US limits the downside for the dollar between now and the end of the year.
"Our global forecasts imply there is likely more room for dollar strength in the near term than what the market is pricing," Goldman said.
The US dollar has surged just over 3% since its low on May 4, and there's good reason to think that the strength could continue, according to Goldman Sachs.
The strength in the greenback comes despite growing tensions in Washington, D.C., amid an imminent US debt ceiling deadline, and it's all because the US economy is holding up just fine, at least relative to other economies, Goldman Sachs' Michael Cahill said in a Tuesday note.
"Credit conditions in the US have not tightened as much or as quickly as initially feared. And, growth in the rest of the world has sputtered a bit relative to robust expectations heading into the year," Cahill said, adding that economic activity in China has hit a soft patch despite high expectations from its economic reopening post-COVID.
Additionally, the lack of a formidable challenger to the reserve status of the US dollar by a foreign currency helps the bull case for the dollar, according to the note.
"Part of the dollar's current strength is because there has not been a compelling case for structural longs in other majors [currencies]," Cahill said. "We are still waiting for a challenger, and the euro is not stepping into the role yet."
All this means that investors shouldn't be surprised if US dollar keeps gaining through the rest of the year, especially as the euro shows more signs of weakening from a key resistance level of 1.10 relative to the dollar.
"Without more evidence of divergence in the euro area's favor, then we do not think EUR/USD can break the recent range to the topside," Cahill said.
With the Fed GDPNow forecast suggesting US economic growth of 2.9% in the second-quarter, and US economic growth recently outpacing the euro area, the much feared trend of dedollarization and threats from the Chinese yuan appear off base.
"Our global forecasts imply there is likely more room for Dollar strength in the near term than what the market is pricing, and ultimately we think total Dollar depreciation for the year will be more constrained than commonly believed," Cahill said.
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