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What’s Ahead for the U.S. Dollar?

2021-04-16

Zach Pandl, co-head of foreign exchange strategy for Goldman Sachs Research, explains why he’s still long-term bearish on the greenback. 

This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
Welcome to our exchanges at Goldman Sachs Markets Update for Friday April sixteen th. Each week we check with a leader across the firm to get a quick take on the watching in the markets this week, beginning discuss the latest trends affecting the US dollar and other currencies. I'm Jake with global head of corporate communications here at the firm and I'm delighted to be joined today by Zach Pandl, who is co head of global foreign exchange strategy for Goldman Sachs Research, stack welcome to the program. Hi Jay so that you ve had a pretty negative view on the dollar. Basically, the tide, valuation, low interest rates in the? U S and a recovering global economy. But you re a note removing your dollar short trade. Can you explain why? Yes, we better negative structural, you on the dollar, but the dollar, a priest,
in the first quarter as the market really repriced its expectations for where the Federal Reserve is headed over time. But we try to do with these trade recommendations is give investors the best expression to try to extract value from the bearish dollar thesis over time we tried to short the dollar versus the commodity currencies G ten in the first quarter like the canadian dollar. Those are basically flat versus the green back, and so we decided to take a step back now. U S rates have begun to stabilize recently. Despite very strong data, your treasury yields are actually bit lower now than where they were one month ago, despite booming growth and upside surprises to inflation and lower. Volatility could open up room for new dollar shorts. We haven't issued new short recommendations just yet, but we were looking very closely at that offer okay, given your the term bearish on on the US dollar. What currencies expect to expect to appreciate against the dollar the next few weeks,
I think the main option is really the euro and closely related currencies in that region. Investors have become pre pessimistic on the Europe and recovery, and we think that that pessimism is somewhat misplaced. Europe is seeing its covet situation. Stabilized vaccinations are picking up and are likely to ramp up substantially over the next few months, and so we're pretty confident on the growth story. There were also have upgraded our forecast for european equity markets and see higher returns in that market relative to the? U S. European central bank is probably gonna, be making some changes over the course of the summer to its bond purchases, which could result in interest rates movie up a bit, so were turning more confident. On the euro. In particular, we have a twelve month forecast of one twenty eight for the Euro dollar Cross and at this point, I'm pretty company
with that target? Ok soldiers from time to time some people who proclaim that the dollar will lose. It satisfies the world's reserve currency, but the dollar as a safe haven asset. Usually, the currency of choice for cross border lending, global trade tends to make and outsize percentage of global foreign currency reserves, but there were snoopy is out from the IMF this month that show that the dollar share of global reserves has fallen to its lowest level since one thousand nine hundred and ninety five? So do you think as global growth bounces back and There are big stimulus for that help. Reverse that decline we think probably non. It is important to stress in this topic that the dollar is not going to lose its reserve currency status, but it is losing its reserve currency status to some degree. The dollar share of global foreign exchange reserves
has been coming down and we think that probably continues over the medium term, because the dollar faces new, genuine competition from both the Euro and the Chinese. You on we're seeing a men european bond market emerge as a kind of by products of the global crisis. Recovery fund issuance is going to be not the middle this year, starting in July, and we think that those actions will be particularly attractive were sovereign investors. Meanwhile, China. Financial opening has really moved into high gear, you've seen a in change in our global fixed income. Investors are treating the chinese market and that reflects micro issues, that China has now been added to many major bond indices, but also macro issues. The high real interest rates in the chinese market and the relatively low valuation of the Chinese you
relative to the US dollar s dollars. Seeing tremendous tremendous flows flows into the chinese market that could also on on the reserve, reserve currency status overtime, You certainly don't wanna be how'd. It go the global role of the dollar. I think that's a very slow moving trend, but we do think that there will be downward pressure on the dollar's valuation, as investors substitute to some degree about the euro and the Chinese you on overtime So finally, the Bite administration recently put out its two trillion dollar infrastructure plan and the funding for that in part would from raising the corporate tax rate back to twenty percent from twenty one percent. One said today: how might
your tax rates. In the. U S effect, the dollar equity portfolio flows across countries can be just as important as fixed income flows, and so anything that negatively effects the. U S, equity market relative to other markets can have implications for the dollar. Our portfolio strategist estimate that, as proposed, they Biden corporate tax planned with lower ass. He be five hundred. Earnings per share for next year by about nine percent, and that drag is one reason why we're forecasting lower turns in the US market market to Non. U S, markets over the next twelve months, and so we start see that materialise. If U S equity markets underperform, we may see some capital out. From the west in search of higher returns overseas, and that can put some our pressure on the dollar as well all right a lot to keep track of thanks for joining us today. Zach my pleasure. That concludes
this episode of Exchanges Goldman Sachs. Thank you very much for listening and if you enjoyed the show where you hope you subscribe and Apple podcast and leave a rating or a comment, this podcast was recorded on Thursday fifteen in the year two thousand and twenty one. Thanks for listening all price references and market forecasts correspond to the date of this recording. This podcast should not be copied distributed, published or reproduced in whole or in part. The information contained in this podcast does not constitute research or are recommendation from any Goldman Sachs Entity to the listener. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the statements or any information contained in this podcast in any like ability, therefore, including in respect of direct indirect or consequential loss or damage, is expressly disclaimed. The views expressed in this podcast are not necessarily the
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Transcript generated on 2021-05-26.