A dovish statement from the U.S. Federal Reserve on Wednesday is but a small setback for the U.S. dollar, with the greenback set to extend its rally against emerging market currencies, according to Goldman Sachs.
"Federal Reserve dovishness may provide some near-term respite, but on a 12-month basis we think that some of the factors arguing for EM currency weakness, such as current account imbalances, commodity price weakness and low inflation, are still present in varying degrees," Goldman Sachs said in a note published on Friday.
The U.S. dollar weakened broadly on Wednesday after Fed Chair Janet Yellen's more-dovish-than-expected comments tempered expectations for a rate hike as early as June. But the greenback quickly recovered in the following session as investors digested the news.
The dollar index is up around 9 percent year to date after rising nearly 13 percent last year amid speculation that a recovery in the U.S. economy would lead the Fed to raise rates.
"The U.S. dollar is in a cyclical bull market," said ANZ senior FX strategist Sam Tuck over the phone. Capital is flowing into the dollar because "the U.S. economy is relatively strong, and interest rates are set to rise and remain higher than anywhere else in the developed world."
The need to adjust to lower oil prices, slowing global growth and the euro's recent tumble against the dollar, will continue to pressure emerging market currencies, analysts say.
For producer countries such as South Africa and Brazil, which are running wide current account deficits, currency depreciation is "an important channel of adjustment," according to Goldman.