US Dollar: Coming to a fork in the road – Goldman Sachs DollarIndex Fed Banks Currencies
is reaching a critical juncture amid US Federal Reserve rate cut expectations, looming recession risks and less dovish Fed commentary."The USD has continued to weaken on softer activity data, cooler inflation and some relaxation of banking sector stresses. It is clear from the March FOMC minutes that Fed officials were concerned that the bank failures could lead to a fairly sizable economic hit via tighter lending standards and a hit to sentiment.
"Markets appear to be pricing a non-negligible risk of a steep downturn that would require deep Fed cuts, but a modal case that, if the Fed delivers just one more hike and is generally more convinced that policy is in restrictive territory already, tightening will come via a currency-negative pullback in credit availability, and a slow rebalancing is underway."
"So, while the recent USD depreciation is understandable given the recent run of data, we continue to think the amount of divergence being priced in FX markets looks vulnerable. The market is pricing a fairly narrow path of a small slowdown but more accommodative policy, and we think that is likely to come to a fork in the road before too long."Information on these pages contains forward-looking statements that involve risks and uncertainties.
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