Dollar Has Bottomed, Euro Will Fall: Goldman Sachs

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.

us_dollar_bill_05.jpg

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 real and 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.