(Bloomberg) — The dollar could stay strong for longer if the Federal Reserve keeps interest rates on hold and other countries choose to cut borrowing costs, Goldman Sachs Group Inc. said.
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“If the Fed remains on hold but more jurisdictions decide to move forward with domestic easing rather than wait for the U.S. central bank, policy divergence could lead to a stronger dollar,” said strategists led by Kamaksha Trivedi and Joseph Briggs. is likely to be prolonged,” he wrote in a note. client. Analysts expect Canada, the United Kingdom and the euro zone to cut interest rates in June.
The dollar has strengthened against all G10 countries this year, with the Bloomberg index, which tracks dollar strength, up almost 3%.
Traders are doubtful that the Fed will make the two rate cuts that were priced in last week so soon after April’s positive inflation numbers. Swaps markets currently expect a rate cut of about 40 basis points at the end of the year, with the November policy meeting priced in for the first full easing of 25 basis points.
Federal Reserve President Christopher Waller said on Tuesday that continued weakness in U.S. economic data over the next three to five months could allow the central bank to consider lowering borrowing costs at the end of 2024. Meanwhile, European Central Bank President Christine Lagarde suggested that the spike in consumer prices is now largely contained and that interest rate cuts are likely next month.
“When the divergence between macro and potential policy becomes more pronounced, policymakers are closely monitoring Fed policy changes to reduce currency volatility,” the analysts wrote. If central banks around the world start cutting interest rates “relatively sooner and more aggressively” than the Fed, it could help the U.S. reach its inflation target, the analysts added.
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