Goldman Sachs Sees Dollar To Go Up 5% Due To Strong US Economy

After an exceptionally strong non-farm payroll report last Friday, Goldman Sachs Group raised its forecast for the dollar, believing that in the context of a strong US economy and tariffs expected to push up inflation, the pace of the Federal Reserve's monetary policy easing may slow down.

Goldman Sachs strategists Kamakshya Trivedi and others wrote in a report: "We expect the dollar to rally by about 5% over the coming year on the realization of new tariffs and continued US outperformance. We still see the risks tilted towards more dollar strength."

This is the second time in about two months that Goldman Sachs has raised its forecast for the dollar. Due to the continued strong growth of the US economy and the plan of the US-elected President Trump to impose tariffs, which may exacerbate inflation, the market's confidence that the Federal Reserve will continue to cut interest rates has been increasingly weak in recent times.

The non-farm payroll report released last Friday became another heavy blow to market expectations: not only did the number of new jobs reach 256,000, far exceeding expectations, but even the unemployment rate, which had been rising slightly, also turned downward to 4.1%.

Due to the extremely strong non - farm payroll report, the team led by Goldman Sachs' chief economist Jan Hatzius has changed the Federal Reserve's interest rate cut path from three times this year in March, June and September, to once in June and once in December.

Bank of America economist Aditya Bhave even announced that in the face of a very strong December employment report, the interest rate cut cycle (of the Federal Reserve) has ended. If the year-on-year growth rate of core PCE exceeds 3% and inflation expectations rise, the next discussion will be when the Federal Reserve will raise interest rates.

In the context of Wall Street's continued concern about the Federal Reserve's slowing interest rate cut pace, Goldman Sachs expects that the exchange rate of the dollar against a basket of currencies such as the euro and the Australian dollar will continue to rise, and the market's optimistic sentiment towards the dollar is expected to further strengthen.

Goldman Sachs currently expects that the euro - US dollar exchange rate will break parity in the next 6 months, to 0.97 US dollars per euro, compared with the previous forecast of 1.05 US dollars per euro. The last time the euro - US dollar broke parity was in 2022, when the outbreak of the Russia - Ukraine conflict triggered a European energy crisis, causing the market to be highly concerned about the economic prospects of Europe.

At the same time, Goldman Sachs lowered its forecast for the pound - US dollar exchange rate in the next six months from 1.32 to 1.22. On Monday this week, the pound fell 0.7%, to 1.2126 US dollars, the lowest level since November 2023.

Goldman Sachs also expects that the Australian dollar - US dollar exchange rate will be 0.62 US dollars per Australian dollar in the next three months, while the previous forecast was 0.66 US dollars. The Australian dollar fell 0.1% on Monday, trading around 0.61 US dollars per Australian dollar.

Goldman Sachs' recent upward revision of the dollar estimate marks a shift in its optimistic expectations for the Federal Reserve's interest rate cuts.

In September last year, Goldman Sachs once lowered its expectations for the dollar because it was expected that the dollar would fall from its high valuation as the Federal Reserve continued to ease monetary policy. However, since the election on November 5 last year, due to the increasing market concerns that Trump's tariff plan may push up inflation, the dollar has continued to rise, making Goldman Sachs' expectations fall through.