Following the Federal Reserve's clearest signal yet of an impending rate cut, Goldman Sachs has joined the chorus predicting a bearish outlook for the U.S. dollar.
In a report last Friday, Goldman Sachs analyst Michael Cahill revised the bank's currency forecasts, responding to the Fed's signal for a swift implementation of "non-recessionary rate cuts." Previously, on November 10, Goldman Sachs had predicted a 3% decline in the U.S. dollar index over the next 12 months, anticipating only a "mild" depreciation. However, the bank now believes the dollar could weaken more than previously expected. Additionally, most analysts surveyed by the media also foresee a weaker dollar next year. Goldman Sachs noted in its report:
The most significant revisions were made to interest rate-sensitive currencies, which had previously struggled under high-rate regimes, such as the Japanese yen, Swedish krona, and Indonesian rupiah.
The U.S. dollar to Japanese yen exchange rate is projected to remain relatively stable at 142 over six months, significantly stronger than the previously forecasted 155. Goldman Sachs also raised its exchange rate forecasts for the Australian and New Zealand dollars by at least 9%.
Following the Fed's decision to keep interest rates unchanged and the dot plot indicating a 75 basis point rate cut in 2024, the Bloomberg U.S. Dollar Spot Index fell 1.2% last week, reaching a four-month low. The market is eagerly digesting the possibility of up to six rate cuts, while Goldman Sachs economists anticipate five.
According to data from the Commodity Futures Trading Commission, hedge funds and other large speculators shifted to a net short position in the dollar for the first time since September, just before the meeting. In the week leading up to last Tuesday, the combined betting positions in major currencies turned into 26,355 net bearish contracts on the dollar. The most significant change was seen in the yen, with a more than 20% reduction in bets on the dollar rising against the yen and almost a doubling in bets on the dollar falling against the pound.
