Goldman Sachs Sees Risk of Greenback Nearing a ‘Messy Top’

(Bloomberg) -- As market odds increase that the Federal Reserve will pause its rate-hike path, Goldman Sachs says its prediction for a weaker dollar could come sooner rather than later.

Over the past week, worsening U.S. economic data -- including a tepid jobs report on Friday -- have led some to consider the chance of a Fed pause in 2019. Goldman Sachs joined that cohort Sunday when it said the odds of a rate hike at the central bank’s March meeting are now below 50 percent. The reduced expectations, in turn, could mean a near-term decline for the dollar.

“The latest news from the Fed raises our conviction in those forecasts and suggests that dollar depreciation could be more front-loaded than we previously anticipated,’’ Zach Pandl, Goldman’s co-head of global currency and emerging-market strategy, said by phone.

Pandl thinks the dollar could be putting in a “messy top,” and is watching Fed communications, U.S.-China trade discussions and the outlook in the euro area for signals on the course of the greenback. One scenario that Pandl sees as possible: the dollar may be weighed down after the Fed’s December meeting, when officials may reduce projections for 2019 hikes to two from three.

Goldman’s chief economist Jan Hatzius and his colleagues have long been predicting four Fed hikes in 2019 after an expected notch higher by the central bank this month. Yet the cut of March odds shows they see a chance now that there may be less than four.

Given this and other crosscurrents, timing is the messy part. “You can’t say with great conviction that these variables are going to be moving quickly and linearly to a dollar-weaker outcome,” Pandl said.

The outlook only adds to a dour picture for dollar bulls. Analysts from Morgan Stanley, Bank of America Merrill Lynch and Citi all see a weaker dollar in 2019, as zesty U.S. growth converges with a more subdued global growth rate.

©2018 Bloomberg L.P.