Goldman Sachs has adjusted its currency forecasts, lowering expectations for the euro against the dollar and raising its projections for the dollar against the yen. The firm now anticipates the EUR/USD at 1.14, 1.12, and 1.12 at the three, six, and twelve-month horizons, respectively, down from previous targets of 1.14, 1.18, and 1.20. Similarly, the USD/JPY path has been revised upwards to 162, 163, and 165, from prior forecasts of 160, 158, and 155.
Goldman Sachs indicates that the factors strengthening the US dollar are likely to persist for an extended period, making a widespread and lasting return to dollar weakness improbable. These forces have shifted rate differentials, particularly the market-implied neutral rate, in the dollar's favor. Additionally, concerns about diversifying away from US assets, which had previously amplified dollar depreciation, have subsided.
The firm attributes the dollar's strength to what it terms "twin economic shocks": a boom in artificial intelligence and an energy supply disruption. These two factors have collectively elevated the relative appeal of US assets. Goldman's baseline forecast suggests that US economic performance will remain sufficiently robust for rate differentials to narrow only slightly, even with a more dovish stance from the Federal Reserve, and that demand for US assets will continue to be strong compared to the previous year.
