Soft US arrivals accompanied by a weak dollar: Goldman Sachs By Investing.com
Investing.com — As the global economy faces uncertainty, the United States appears to be on its way to a “soft landing,” a state in which the economy slows without a recession.
This potential outcome, according to each analyst at Goldman Sachs, is associated with weakness. “Despite recent market turmoil, the US economy appears to be close to reaching soft territory, and the Fed may issue its first non-recessionary rate hike in September,” analysts said.
The expectation is that this policy move will help the economy stabilize without going into a full-blown recession.
The term “deceleration” refers to a situation where economic growth slows enough to stop inflation but not to a degree that causes recession.
Historically, achieving such an outcome has been challenging, but current economic indicators suggest that the US may be able to navigate this delicate balance.
Analysts at Goldman Sachs are flagging a unique development in the current economic environment: the recent recovery in risk sentiment has been accompanied by dollar weakness, rather than strength, as seen in previous periods of strong US equity performance. This change added momentum to the “soft, weak dollar” trade.
There are several factors that contribute to this situation. A potential rate cut by the Fed is a key driver, as it could adjust real rates faster than other central banks facing inflation risks.
If these rate cuts are considered part of a policy adjustment rather than a response to a recession, they tend to support equity markets. In turn, this equity growth, coupled with improving global growth expectations and positive risk sentiment, generally puts downward pressure on the dollar.
Goldman Sachs also points out that the dollar's relationship with US growth is more relative than absolute.
The dollar is not always stable when US growth is strong, and it is not always weak during periods of weak growth. Rather, the dollar's performance is largely related to how the US's growth compares to the growth of other major economies.
For example, when US growth is negative while the rest of the world is growing well, the dollar tends to weaken. This relationship underscores the importance of considering global economic conditions when evaluating the dollar's trajectory in response to US economic data.
“Especially now, we would caution that the sensitivity of the broader Dollar to equity performance is at least as high as relative rates this year,” analysts said. When US equities underperform global equities, the dollar tends to strengthen.
However, in the current environment, where the Fed is expected to ease monetary policy while US equities remain strong, this volatility could limit the dollar's rate of decline.
The current value of the dollar is an indicator of the high return that US assets provide over the long term.
This has attracted significant foreign investment, as nearly 30% of goods that cross borders are now allocated to the US. Such demand has supported the high valuation of the dollar, making it less susceptible to rapid depreciation.
However, as the US approaches a potential soft landing, the combination of easing monetary policy and tight equity markets could create conditions for a gradual weakening of the dollar.
Analysts at Goldman Sachs warn that while the dollar may face downward pressure, the process is likely to be gradual, with the dollar's rich value providing a buffer against rapid declines.
