The dollar surged amid high inflation and a hawkish Federal Reserve rate hike, hitting the euro, yen and yuan, among others. Goldman Sachs thinks the dollar topping may be closer than the market thinks.
Goldman Sachs pointed out that historically, the dollar peaks when the US and global economic growth bottoms, or the Fed begins to ease monetary policy. Given that Goldman Sachs doesn’t expect the Fed to start cutting rates until 2024, that suggests the dollar won’t peak anytime soon.
However, Goldman believes that today’s situation is a more suitable comparison to the case of the dollar peaking in the 1970s and 1980s, because these periods also saw high inflation.
It can be seen that the Fed’s substantial easing of monetary policy or inflation peaking is not a necessary condition for the dollar to peak. On the contrary, once the market thinks it is clear that the Fed may be about to pause rate hikes, or the Fed’s message turns, the dollar may peak early.
As a result, Goldman Sachs expects the dollar to peak next year, not 2024 as other historical cases suggest.
“Sometime in the first half of 2023, we may see the intersection of these factors: the worst of the European winter recession is over, the new leadership of the Bank of Japan is gradually starting to tighten policy, the zero policy in China is coming to an end, the U.S. Interest rates are nearing their peak. At the same time, U.S. inflation and the labor market will start to slow,” the report said.
DBS Bank believes that the pattern of strong dollar appreciation will continue until the end of this year, and it is estimated that after the rate of interest rate hikes will slow down from 2023, the dollar will gradually depreciate.