Goldman Asset Frets Dollar’s Surge May Deter Fed If It Goes On

(Bloomberg) -- The dollar’s climb to a seven-month high has Goldman Sachs Asset Management concerned further appreciation could undermine the U.S. economy and deter the Federal Reserve from raising interest rates in December.

The Fed may hold fire if the trade-weighted measure of the greenback climbs to levels last seen in January, the asset manager said in a note to clients Oct. 28. The gauge is at its highest level since March 1. While Goldman said it still expects tightening in December, it has increased its bullish bets on the Mexican peso, Malaysian ringgit and Indian rupee that benefit from higher commodity prices and “decent global growth.”

“The Fed has expressed concerns about the dollar strength given the impact on financial conditions,” Goldman Asset wrote in the note. “Tight financial conditions contributed to the Fed’s decision to delay its first rate hike and we believe that similar concerns may arise if the dollar appreciates back to its January levels.”

The Bloomberg Dollar Spot Index, which measures the U.S. currency’s performance against a basket of 10 major counterparts, advanced 0.1 percent as of 6:33 a.m. in London from Friday when it retreated 0.3 percent after touching a seven-month high. The index has risen 2.2 percent in October, poised for its biggest monthly gain since May. The yen, which is set for its worst month since May, slipped 0.1 percent to 104.84 per dollar.

The Bloomberg U.S. Financial Conditions Index, which tracks the overall level of financial stress in the U.S. money, bond, and equity markets, has had negative readings since late July and was at minus 0.38 Monday. A negative value indicates tighter financial conditions.

Fed Outlook

The market’s implied probability of a rate increase by the Fed in December fell to 69 percent as of Friday, its lowest level in a week. The odds of a move at the central bank’s policy meeting this week are 17 percent.

Still, the resilience shown by of other asset classes such as equities and oil despite the dollar’s strength over the last couple months may encourage policy makers to tighten, according to Vassili Serebriakov, a foreign-exchange strategist at Credit Agricole CIB in New York.

The trade-weighted broad dollar index, which tracks the U.S. currency versus 26 of the country’s biggest trading partners, has rallied 3.1 percent since its lows Aug. 18. At the same time, the S&P 500 Index has slipped just 2.8 percent in the same period, while crude has risen 0.5 percent. That pales in comparison to market moves from mid-October 2015 to early January, when the trade-adjusted dollar gauge gained more than 5 percent. The Fed last raised rates in December.

FBI Impact

The Mexican peso rose 0.2 percent to 18.9394 per dollar as a CBS/YouGovsurvey showed support for Democratic candidate Hillary Clinton holding firm after the Federal Bureau of Investigation said that it is re-opening an inquiry into her use of private e-mail while secretary of state, less than two weeks before the U.S. presidential election.

The peso has tended to weaken on evidence Republican nominee Donald Trump’s electoral prospects are improving. It fell 0.8 percent Friday after FBI Director James Comey’s announcement.

“Clinton is still closer than Trump in securing the 270 electoral college votes needed to win the presidency,” Philip Wee, a senior currency economist at DBS Group Holdings Ltd. in Singapore, wrote in a note to clients. “Even so, the market is wary of a Brexit-like outcome at the presidential election,” he said referring to the shock decision of British voters in June to leave the European Union.

To contact the reporters on this story: Narayanan Somasundaram in Sydney at nsomasundara@bloomberg.net, Lilian Karunungan in Singapore at lkarunungan@bloomberg.net. To contact the editors responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net, Tomoko Yamazaki, Naoto Hosoda