Goldman Sachs has revised its foreign-exchange forecasts, cutting its outlook for the euro while nudging its projected USD/JPY trajectory higher. The bank attributes its changes to what it describes as two concurrent economic disturbances - an artificial intelligence investment boom and an energy supply bust - that have together elevated demand for U.S. assets and made a widespread, sustained return to dollar weakness unlikely in the near term.
Goldman says the AI-driven surge in capital spending has increased inflationary pressures at least over the near term. At a recent conference in Sintra, Federal Reserve Chair Warsh underlined that this combination of stronger capex and attendant inflationary dynamics appears to be a distinctive feature of the United States relative to other developed-market economies, Goldman noted. That uniqueness, in turn, has shifted market-implied neutral-rate expectations and other rate differentials toward the dollar.
The bank observes that these forces have dampened the tenor of calls to diversify away from U.S. assets - calls that helped push the dollar lower about a year ago. Goldman characterizes dollar performance this year as bifurcated: the currency has strengthened versus low-yielding currencies and weakened against those offering higher carry.
In concrete forecast terms, Goldman lowered its EUR/USD targets to 1.14 at three months and 1.12 at both six and 12 months, down from prior projections of 1.14, 1.18 and 1.20 respectively. For USD/JPY, the bank now expects a path of 162, 163 and 165 at the three-, six- and 12-month marks, compared with previous forecasts of 160, 158 and 155. Goldman also reports revising forecasts stronger for several emerging-market, higher-yielding currencies, including the Indian rupee and the Colombian peso.
The analysts laid out risks that could move the dollar in either direction. On the downside, a more even distribution of activity and policy prospects across economies - or a reappearance of credibility issues that weighed on the dollar's high valuation last year - could erode the currency's strength. On the upside, confirmation that policy needs to be more restrictive could trigger outsized foreign-exchange moves if policy diverges more sharply than markets currently price in.
Goldman says its baseline view is that U.S. economic performance will be "sufficiently solid" to keep rate differentials from narrowing much, even amid what the bank describes as a more dovish interpretation of Federal Reserve policy. That baseline assumes demand for U.S. assets remains stronger than it was last year.
The bank also highlights the Chinese yuan as a notable exception to the high-versus-low-yielder pattern seen in the first half of the year. Goldman expects the yuan to continue benefiting from firm policy support in China, which it says will limit the potential for broad dollar appreciation.
Goldman says it first signaled tactical dollar support versus low-yielders in mid-March and adjusted its forecasts accordingly at that time. "We increasingly think these forces look likely to linger for longer," the bank added.