Goldman Sachs observes another indicator that the US dollar remains robust against its challengers. The broad dollar index has surpassed the October 2023 highs, with recent strength attributed to a lack of Federal Reserve rate cuts and strong US real rate advantages, making the dollar a formidable currency.
Key Points:
Broad-Based Strength: The broad dollar index has ticked above its October 2023 highs. This recent strength is more broad-based and driven by emerging markets, particularly the Mexican Peso (MXN).
Idiosyncratic Influences: Specific factors, such as the performance of the MXN, have played a significant role. Goldman Sachs anticipates that the influence of these factors will gradually diminish.
Fed Policy Impact: Unlike last year, when Dollar strength was partly due to the prospect of more Fed rate hikes, the current strength is increasingly attributed to the absence of Fed rate cuts. This policy stance has helped maintain the Dollar's advantage.
US Real Rate Advantage: The US real rate advantage and strong asset returns continue to bolster the Dollar, making it difficult for other currencies to compete. This dynamic is also influencing key Asian FX crosses, such as the Japanese yen and Chinese yuan.
Election Risk Support: The upcoming US election has added an additional layer of support for the dollar, as election-related uncertainties contribute to its strength.
Conclusion:
Goldman Sachs' analysis highlights the enduring strength of the US dollar, driven by broad-based support from emerging markets and a solid US real rate advantage. The lack of Fed rate cuts and the upcoming election risks are also contributing to the Dollar's robustness. As these factors continue to play out, the Dollar is expected to maintain its edge over global challengers, influencing market dynamics and investment strategies.
For bank trade ideas, check out eFX Plus. For a limited time, get a 7 day free trial, basic for $79 per month and premium at $109 per month. Get it here.
