Why the Dollar's Rally Can't Last


The dollar's had a nice run, but the strategists at Goldman Sachs say the tide is just about ready to turn.

Sure, it's had some ups and downs, but all in all, the dollar has had a nice move in the last several weeks. But before you go getting all bullish on the buck, the strategists at Goldman Sachs would like a word.

"Recent dollar strength is very narrowly based," they say in a note to clients. "About 55% of the rise in the U.S. dollar trade-weighted index is against JPY, 15% against EUR, 12% against BRL, and 7% against CNY. In other words, four currencies account for basically the entire move in our dollar trade weighted index since early February."

It's a very different situation from the late 1990s, when the U.S. dollar rose as the currency of the country that was driving global growth.

Why should you care? Because, the strategists say, that suggests that the dollar's move is really being driven by just a couple of factors, like improving U.S. data and the ipickup in risk appetite after the European Central Bank's refinancing operation. "A broad-based rise in prices is more likely to be seen by central banks as genuine inflation, while idiosyncratic moves (that could reflect anything from tax hikes to rising oil prices) are more likely to be ignored by policy makers," Goldman says, and thus are less likely to lead to currency-boosting moves like interest rate hikes.

Not only that, when a currency move is narrowly based, not much has to happen for it to change course. In fact, that's what Goldman warns about. "We see this as supportive of our view that broad USD weakness will resume," they write.

Be careful.

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