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Goldman Says US Dollar Has Bottomed, Euro to Fall



August 14, 2008 – Comments (6) | RELATED TICKERS: GS


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NEW YORK--Stabilizing U.S. economic growth, falling oil prices and a deteriorating outlook outside the United States have led Goldman Sachs to abandon its ten-year bearish stance on the U.S. dollar.

In a research note Thursday, the largest U.S. investment bank said the dollar's long-term downtrend has ended and its undervaluation could lead to a substantial improvement in the U.S. balance of payments position.

"It is time to say goodbye to our long-held dollar bearish stance. For about 10 years we have been negative on the dollar, occasionally wrong but mostly right," Goldman Sachs wrote in a research note.

"But now the valuation and growth-driven improvements that we have been observing for a while have reached the point where they notably improve the medium to long-term outlook for the dollar."

It added, however, the dollar could still face some challenges in the near term such as market positioning, volatility in oil prices and weaker U.S. consumer spending. But the "powerful improvements in the real trade balance suggest the dollar has bottomed." The bank expects capital inflows to start improving.

Goldman revised its forecasts for several U.S. dollar pairings. It now sees the euro falling to $1.45 in three months, compared with estimates of $1.56. The euro should drop further to $1.40 over the next 12 months.

On Thursday, the euro traded a near-six-month low at $1.4779, according to Reuters data. The dollar has gained more than 5% against the euro so far this month, reaching its highest since February.

On dollar/yen, the bank said it forecasts the pair hitting 110 yen in three months from its original estimate of 106. Over the course of one year, Goldman said the dollar should rise to 114 yen.

A big part of Goldman's change in stance on the dollar was the more widespread weakness in economies outside the United States, which has led to sizable interest rate differentials in the greenback's favor. Interest rate markets have priced in rate cuts for major central banks, including the European Central Bank and the Bank of England, which should diminish their currencies' appeal to global investors.

Aside from rate differentials, Goldman said the U.S. economy is finally adjusting favorably to an undervalued dollar.

"The impact of valuation has become much clearer and more powerful -- increasing our confidence that strong, underlying forces will lead to continued improvement in dollar fundamentals in the next couple of years."

It added that a strong U.S. export performance and signs of growing inflows from mergers and acquisitions should clearly boost the dollar.

About other currencies, Goldman said it has become more upbeat on the outlook for the Brazilian realand Mexican peso .

"Certainly the growth story in Brazil and firm balance of payments surplus should allow the currency to shrug off the broader U.S. dollar strength," said Goldman.

6 Comments – Post Your Own

#1) On August 14, 2008 at 6:43 PM, Ozcutty (74.49) wrote:

Being saying this since Jan, Uk, Ireland, Spain, Italy, Portugal, New Zealand, all going into recession, more overvalued housing than the US!

Only a matter of time before all the big money starts flowing into US and US equities. Best companies in the world, Coke, Micorosoft, Cisco, visa, etc plus cheap currency.

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#2) On August 14, 2008 at 7:57 PM, TDRH (96.66) wrote:

Ozcutty, you may have  a point, but I always wonder why these investment banks "volunteer" their analysis.   Nothing in life is free, have to wonder about their motivation.

A month ago oil was over 140 and many were saying the dollar was done.   What changed so dramatically?

I would bet a steak dinner that the reason they mentioned the Brazil Reais and Mexican Peso is because they are already betting there and are looking for an exit.   The Reais is at 1.62 to the dollar, how much stronger do they think it can get?   The country has fundamental problems that can easily wipe out their recent gains.    Four 5 years ago the Reais was at 4 to 1- any investment growth in Brasil will have to be organic, without currency compounding I do not think it is a good place to be.

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#3) On August 14, 2008 at 7:58 PM, jester112358 (28.07) wrote:

And as we print even more of it it will get even cheaper won't it?  Wait, that's just the opposite of what GS is saying.  Could they be trying to fool  other people like they did with their MOS "conviction buy" call about a month ago (MOS has since dropped about 40 points giving them a nice entry point)  At least they were honest enough to admit that 13% interest on a CD in Brazil beats a 3% return in the US.  GS are rumor mongers, market manipulators without compare.  Just check how much an individual investor would have gained by doing the opposite of whatever they suggest.   Just do the opposite of what guys like this are saying and you can't go too far wrong. 

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#4) On August 14, 2008 at 8:16 PM, lquadland10 (< 20) wrote:

Oh give me a brake, here is how it works. Goldman sacks and JP Morgan Chase are the ones who are running the fed. Let me stick my neck out further and say they also run the Treasury of the USA. Paulson is from GS. and so is the new guy they brought in. It is a fixed market and once you know that then you can fallow where the money goes and up will make a little money. My Caps will show you how wrong I am but in real life I cost average down for where the next bubble will be. It will take 30 years but you can make some bucks. The Rockefeller's told us what it would be. Alt. energy for the global warming hype. Weather you believe it or not it is a done deal. The powers that be have spoken.

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#5) On August 14, 2008 at 8:36 PM, abitare (29.51) wrote:

GS just said Oil was going to $200, two weeks ago? With GS you are better off doing the opposite of what they are providing, IMO

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#6) On August 14, 2008 at 9:10 PM, GNUBEE (< 20) wrote:

Ares, you beat me to it. I guess Goldman has Demon and Sempers Bet covered then.

Is there a bizzaro "trackGS" in Caps? If so I'm going to copy every pick in that puppy

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