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 on 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 percent 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.