Goldman says greenback could be stronger for longer

Strategists mull Fed holding steady while peers begin cuts.

The dollar may remain stronger for longer if the Federal Reserve keeps interest rates steady, while other nations opt for a reduction in borrowing costs, according to Goldman Sachs Group Inc.

“If the Fed holds steady but more jurisdictions decide to proceed with domestic easing rather than waiting on the US central bank, then policy divergence would likely keep the dollar stronger for longer,” strategists led by Kamakshya Trivedi and Joseph Briggs wrote in a note to clients. The analysts see June interest rate cuts for Canada, the UK and the euro area.

The dollar has advanced against all of its Group-of-10 peers this year, with a Bloomberg index tracking the greenback’s strength gaining almost 3%.

Traders have grown doubtful of the Fed delivering the two rate reductions that were priced injust last week in the immediate aftermath of abenign inflation reading for April. The swaps market is now anticipating around 40 basis points of rate cuts for the end of the year, with the first full 25 basis point of easing priced into the November policy meeting.

A continued softening in US data over the next three to five months would allow the central bank to consider lowering borrowing costs at the end of 2024, Federal Reserve Governor Christopher Waller said Tuesday. Meanwhile, European Central Bank President Christine Lagarde indicated that a cut is probable next month, with the rapid gain in consumer-price growth now largely contained

“Where macro and potential policy divergence has been more apparent, policymakers have kept a keen eye on Fed shifts to limit the extent of currency volatility,” the analysts wrote. If central banks around the globe start cuts “relatively earlier and more aggressively” than the Fed, that could help the US to reach its inflation goal, they added.