The employment report was better than expected, and the ISM business activity indices demonstrated resilience, indicating stable economic growth and persistent inflationary pressures.
Goldman Sachs stated that the US dollar remains supported by strong economic data and rising interest rate expectations, although improving global risk sentiment and foreign exchange resilience could limit further gains.
Recent US data has strengthened the dollar. The employment report was better than expected, and the ISM business activity indices demonstrated resilience, indicating stable economic growth and persistent inflationary pressures. This is supporting Treasury yields and widening the interest rate differential in favor of the dollar.
The bank noted that these factors are particularly favorable against major developed market currencies, particularly in Europe, where economic growth prospects remain weaker.
Energy markets are exerting competing pressures. Progress in US-Iran negotiations has raised hopes for lower oil prices, improving the outlook for major energy-importing countries and supporting several cyclical currencies. Commodity-linked currencies and high-yielding emerging market currencies have remained relatively resilient despite ongoing geopolitical tensions. This has dampened some of the demand for safe-haven assets that typically supports the dollar during periods of uncertainty.
The Chinese yuan also continues to strengthen gradually, a trend analysts expect to last longer than most investors anticipate. The Japanese yen also remains stable, supported by currency interventions and the prospect of further regulatory action.
These trends have led to mixed performance for the US dollar. Goldman noted that the dollar index, which heavily weights the euro and other major currencies, has risen about 1.5% year-to-date. Meanwhile, the broader trade-weighted dollar index has declined slightly.
In the short term, conditions remain favorable for the dollar: the economic fallout from the Iran conflict and elevated inflation continue to support interest in US assets. Analysts expect these factors to support the dollar against major currencies in the coming weeks. Federal Reserve policy may soon take center stage. The bank noted that Fed Chairman Kevin Warsh could take a more hawkish stance than markets currently expect, given robust economic activity and stubborn inflation.
However, strengthening global equity markets and improved geopolitical sentiment could partially offset this support. Absent a clear shift in economic data or risk appetite, Goldman expects the dollar to remain broadly rangebound, creating a favorable environment for carry trade strategies.