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Goldman Sachs Goes Against Consensus in Dollar Call

By Andrea Wong
December 13, 2013 4:10 AM EST 41 Comments
Currency
Currency

Goldman Sachs Group Inc.’s Thomas Stolper, who correctly predicted the dollar’s slide against the euro this year, is deviating from the consensus that the greenback will be among the best currencies to own in 2014.

The dollar will weaken through 2014, reaching $1.40 per euro for the first time since October 2011, Goldman’s London-based chief currency strategist said. The mean estimate in a Bloomberg survey of 46 contributors is for a 7 percent rally to $1.28 per euro from $1.3758 today.

Firms from BNP Paribas SA to Barclays Plc and Morgan Stanley say a strengthening U.S. economy will allow the Federal Reserve to pull back on stimulus measures that include printing dollars to buy $85 billion of bonds every month. For Stolper, that will be offset by the Fed keeping its benchmark interest rates at about zero even as it reduces bond purchases.

“Tapering is in the price already, we find it difficult to see where the dollar strength would come from,” Stolper wrote in an e-mailed response to questions this week. “There is always a risk that stronger growth in the U.S. suddenly pushes rates even higher as markets anticipate a stronger Fed response. However, our base case is that we see only marginal support for the dollar from interest rates.”

Stolper’s Calls

Stolper, 45, predicted in December 2012 that the dollar would trade at about $1.33 per euro in June. It averaged $1.32 that month, falling as low as $1.34. He cut his outlook on the dollar Sept. 12 when it was trading at about $1.33, predicting it would weaken to $1.38 per euro in three months, from a previous forecast of $1.34.

Of 46 analysts surveyed by Bloomberg, 42 expect the greenback to gain against Europe’s common currency next year as rising Treasury yields lure international investors from lower returning counterparts. Benchmark 10-year Treasury notes yield 104 basis points, or 1.04 percentage points, more than comparable maturity German bunds, close to the biggest premium in about seven years.

The Bloomberg U.S. Dollar Index has risen 1.8 percent from an eight-month low in October as gains in employment added to speculation the Fed may slow its quantitative-easing program as soon as next week’s policy meeting.

Rising Euro

The euro has strengthened 4.3 percent this year against the dollar, making it the best performer among 16 major currencies tracked by Bloomberg. It got an added boost after European Central Bank President Mario Draghi left interest rates unchanged and gave no indication he would take further steps to ease monetary policy.

“We expect all major central banks on hold until at least late 2015 -- hence, no immediate catalyst” for further gains in the dollar, Stolper said.

While strategists predict broad dollar gains, investors are hedging their bets ahead of the Dec. 17-18 Fed meeting.

Futures traders reduced net wagers that the dollar will gain versus eight peers including the euro, yen and pound to $18.9 billion as of Dec. 3, from $19.1 billion a week earlier, according to Commodity Futures Trading Commission data compiled by Societe Generale SA. The net long position on Nov. 26 was the most since Sept. 10.

Following the end of the first two rounds of quantitative easing, the dollar showed little momentum. The Bloomberg U.S. Dollar Index rose 0.4 percent the month after what’s known as QE1 was completed in March 2010, and fell 1.3 percent the month after QE2 in June 2011.

Inflation Change

“The dollar may stay here for a while as the Fed will get away with the story of inflation is nowhere to be seen,” Jose Wynne, the head of foreign-exchange research at Barclays in New York, said in a phone interview. “But this may change in the second half of next year, when inflation starts to turn around.”

Barclays forecasts the dollar will rally to $1.27 against the common currency by the end of 2014.

Since reaching a three-year high of 3.9 percent in September 2011, inflation has slowed. In October, consumer prices rose 1 percent from a year earlier, the smallest increase in four years, according to a Nov. 20 Labor Department report.

Better economic growth in the U.S. relative to most developed nations will support the dollar, according to Morgan Stanley. The world’s biggest economy will grow 2.6 percent in 2014, versus 1 percent in the euro area and 2.4 percent in the U.K., according to separate Bloomberg surveys.

Key Drivers

“In this environment, we believe that relative growth differentials will be key currency drivers, and these are dollar-supportive, given that the U.S. private sector has delevered more than the rest of developed markets,” Morgan Stanley strategists led by Hans Redeker in London wrote in a Dec. 2 report.

At the same time, a persistent deficit in the current account, which is the broadest measure of trade because it includes investment, hurts demand for the dollar, according to Stolper. The shortfall was $98.9 billion in the second quarter. The euro area recorded a current-account surplus in September for the eighth consecutive month.

“A growth story convincing enough to see international investors commit more capital to the U.S.” is necessary for a breakthrough in the dollar, Stolper said. “So far, we have seen mainly capital outflows from the U.S.”

To contact the reporter on this story: Andrea Wong in New York at awong268@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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