Zach Pandl of Goldman Sachs Research explains the factors driving U.S. dollar weakness.
This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This is exchanged Goldman Sachs will we discuss developments currently shaping markets industries in the global economy, objects, seaward, global, had of corporate communication, chaired the firm entered I'm joined by Zack Panel CO, head of the global foreign exchange interest, rates in emerging markets strategy in Goldman Sachs Research. Second, this team of a new report out cold revenge of the two dollars and today will give his views on the strength of the US dollar compared to some foreign currencies. The problem is Jake, so said the state talk about where the dollar was compared to other foreign currencies, as we came in to the year two thousand and twenty
The dollar started this year on very strong footing. Really you come from a five year period in which you s, acid markets, have substantially outperformed the rest of the world, so the Federal Reserve went on a rate hyping cycle. Whereas the rest of the World CUP rates at a negative place. An U S. Corporate earnings have substantially outperformed, is well led by the mega cap tax stocks that dominate the. U S, markets On top of that, the dollar has always this disrupt safe haven appeal. Let us help support the currencies. I wish in through things like the trade war last year. So all of these factors and driven a lot of work, folio flows from around the world into U S markets over the last five years or so, and right, is the dollar's valuation quite substantially soaked, even so much Oh that there has been an on again off again debate about either the? U S. Government should take active steps to try to intervene and weaken the dollar's value so, and we always
The second question about whether we want a strong dollar in the United States, but we certainly had won in the last couple of years ok, so hadn't corona virus in the onset of that affect you, a dollar. What's your outlook for the Green back today going forward, so the crisis really had to your almost contradictory effects the dollar. On the one hand, it raised the dollar's value quite substantially, so the dark and went straight up in markets during the big equity draw down at the outset of the crisis, so it help. Raise the dollar's value further beyond where we started a year. On the other hand, the crisis has also caused the Federal Reserve to lower interest rates down around to their lower bound, so be high couple of rage relative to other markets has been one thing, holding up the door value in recent years, and now that's gone away:
one hand you have more dollar strain. On the other hand, one of the key fundamental backers supporting that strength has gone away. So I think we put those two things together and I think it is fair to say that the crisis has made the: U S, currency, look quite a bit more vulnerable now until recently, we hadn't really been ready to recommend that investors express their views in portfolio. So these things were true in March. That bad we got down to zero in the dollar was very expensive, but we were generally this courage, investors, from putting down I'm sure you're going lawn other currencies in portfolios. reason for that is the dollar is a counter cyclical asset or a safe haven ass. It attends to go up in bad times and down good time. So we needed to have more confidence that the globe call me really was seeing a sustainable recovery before recommending active dollar short in portfolios.
The commission has been that now and we become more vocal about encouraging investors, position for dollar weakness and portfolios. Today, I would say that because, The dollar's high evaluation, perhaps you're twenty percent or overvalued at the highs in March and April, be downside could be fairly substantial if a trend develops, because you are starting from hi evaluation, so are open when the door would be that your fundamentals for the? U S, currency, look pretty poor value. nations are high and you have a kind of classic recipe for sustained. We so we would be fairly negative army dollar, especially if the global economy, as a fairly robust recovery over the next few quarters Why? In the meantime, there has obviously been some concern about a second wave outbreak in the? U S, and yet the dollar has strengthened wise. The? U S currency appreciating on what looked like very: U S, centric risks yeah that one,
a surprising outcome for most currencies, but this is actually a fairly typical pattern for dollar and we think it reflects the. U S: currencies unique global role? we usually encourage investors to think about their really being too dockers, there's a kind of domestic dollar which behaves like any other currency. But there is also this international dimension to the dollar, which is unique. Do you ask? and see denominated quite a lot of goods and assets outside of it. country outside of the United States, for example, U S economy, maybe something like one fifth of the global economy, but the dollar account for something like sixty percent of global foreign exchange reserves Thirdly, the currency of choice for cross border lending and global trade and treasury are the world's primary,
He paid an asset about half the treasury market is also held by overseas investors, so the dollar has this international dimension, that's unique, and we think that these features are what caused the correlation that we observe and markets. The dollar tends to go in bad times down in good times, reflecting its international rules are even when the risks that markets are concerned about our beginning in the United States. If they're big enough and they back to the global economic outlook or investor risk appetite. They can paradise, ethically raise the dollar's value, and I think that's exactly what foreseeing respect that makes sense. the dollar's vulnerability and the potential for some degradation there. What major currencies do you think will drive dollar. We do so with the quarters that currency markets are always a relative value, ass, a class. So it is, of course the right course. Didn't you say no four dollars going to go down. What's going to go up and I think among the smaller currencies, there are a number of key
It's actually bought among the major currencies. I really think that it's a question about the euro at this stage and our view would be that, in addition to there being a bare case for the: U S dollar, there is a bull case for the Euro. I would highlight three things. The first is that the euro is very cheap, so the dollar is expensive The euro is cheap. We would put long run fair value for the Euro dollar exchange rate around one. Third, Today, around one twelve, you are deeply undervalued and we see that reflected in conventional things like the Europe, your areas, large trade surplus and otherwise strong balance. Payments picture, so the Euro area does seem to show the classic signs are very competitively valued exchange rate, a cheap exchange rate.
Second, we think that the Euro area is likely to have a steeper and smoother recovery from the corona virus recession than the United States. In part that reflects the deep hole that Europe is coming from, but it also it's better virus control. We ve seen the reopening process proceed, pretty steadily in Europe with limited effects on the outbreak, so it more successful reopening process. We think maybe a little bit faster European growth over the coming quarters. Lastly, through the crisis, we have seen some important structural. changes in Europe's fiscal architecture that I think are very important to recognise regular. The recovery find the proposal from Europe from Germany and France is a big step. Two more pistol risk sharing more burden sharing the Euro area, which had been a feature that many observers had criticized many investors at pointed to, as reasons to be released.
and to be long european assets on a structural set, so Europe's fiscal architecture is kind of coming together during the crisis, and we think that that is an important factor to remove tail risks for the common currency. Cheap valuation. More cynical upside, reduce tail arrest, you put those together and Euro area picture, looks relatively attractive within more outside the downside risks for the Euro currency, you have talked a lot of investors around. These views are getting any pushed back from Investors on your views on the euro versus the dollar. Yes, I think that there be These do resonate to a degree with many investors, but we certainly get plenty of pushed back as well, and I would say that primarily from equity investors at this point, many equity investors, look backward and see the really substantial. U S! Market! Outperformance! In! U S, earnings growth outperformance compared to Europe over the last five or more years and question whether Europe.
in companies really have the capacity to outperform on a sustained basis, the? U S, firms That's really where, along with debate, is among international investors at the moment is whether european corporate earnings can keep pace or outperform? U S. Corporate earnings were, that possibility with warmed up our equity strategies and warmed up on the case for european stocks relative to the U S market. But I would say that's really where a lot of the pushed back in debate is in currency markets today before carbon head always talked about in allowing these conversations was the? U S, election, that's faded. A little bit insignificance for investors. Body is coming to the forefront again now, as the wrist around become at least clearer. How might, though, outcome of the? U S, election effect currency markets. This is done
in ITALY, getting more attention and currency markets today, and we would highlight a couple of specific policy proposals or trends that could affect the dollar or other currencies. The first is the corporate tax rate, which is the info across a lot of markets, but including currency markets. If U S corporate tax rates, no up, if we hold all else equal, that would make you s shares a little bit less attractive on a relative basis to their international peers. And that could have some implications for the dollar. The dollar strengthened late, two thousand and seventeen as the corporate tax bill was being passed. Moving towards pathogen in late two thousand and seventeen, so we see the reverse of that over the coming years. That could lead to some this temporary dollar weakness. On the back of that. The second topic is really around tariffs. The dispute, in the United States and China. I don't think anybody things are really going away and longer term sense by vice. President Biden does seem to have a lower appetite for using terrorists. Specifically, then, president
so we do think that an abiding administration tariffs that had been sunshine, and maybe other tariffs as well could be rolled back, and that would tend to be a positive one, the Chinese you on relative to the dollar, as well as other China, sensitive currencies, for example like the Taiwan dollar. Lastly, I think one big picture point is worth mentioning: currency markets are partly affected by you: I didn't states its role in the world. The world holds a lot of dollars, reflecting the United States is story, a role in the world if that undergo change, then that could have currency market implications. In recent years we have seen these efforts towards de dollar relation reflecting this trend countries trying to find a way to have You were dollars in their foreign exchange reserves, your dollars in their cross border trade, etc. In a second Trump term, where the? U S is pulling back from
some international institutions and changing the way that its partner in the world? We could see those efforts continue and that may have some dollar implications in the long run. So we do think that the election is a potentially important factor for the? U S currency, in my view that the tariffs issue is probably the most direct and meaningful for investors. over. The next couple of quarters are exactly lots of talk of DE delegation over the years and yet never seems to really get that much momentum was act thanks for joining us today. Fastening discussion thanks for having it. That concludes this, sort of exchange. The Goldman Sachs thanks for list and, if you and joy, the show we hope you subscribe and Apple pod cast and leave a rating or a comment, and please turn in Friday for a weekly markets update where leaders round the firm provide a quick take on the latest in markets. This pod cast was recorded on Tuesday June thirtieth. Two thousand
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Transcript generated on 2021-07-02.