Goldman forecasts US dollar set for sharp decline: $1.85 to sterling, $1.55 to the euro

As a result of the Federal Reserve’s next round of quantitative easing, Goldman Sachs is predicting a sharp slump in the US dollar’s value against other major currencies. In particular, the dollar is expected to weaken to $1.79 against the British pound over the next six months, $1.85 over the next year. The dollar will also weaken against the euro to as low as $1.55, according to Goldman. This is far cry from Dollar-euro parity. If the dollar does weaken to these levels, it will likely fan trade friction.

Notable in this discussion is that the all of the adjustment for US dollar currency debasement falls on the floating rate currencies like the euro, the pound, the Swiss franc and the yen. China’s currency, because of its fixed peg to the US dollar, will depreciate as well, setting up tensions with Japan and Europe.

In my view, the best case scenario here is a rebound in bank lending and job growth in the U.S. coupled with a stable housing market. This would limit QE, increase aggregate demand, and reduce trade friction. 

In the event that the US economy remains weak and the Fed feels forced to try QE, what can be done to stop the ill effects on trading partners?

  1. Some of this depends on the economy. If the US economy improves at a better than expected rate in 2011, the quantitative easing will subside, halting the dollar’s fall.
  2. The U.S. and China could try to negotiate a maximum rate of US dollar reserve accumulation by the Chinese central bank in order to revalue the Yuan.
  3. The Chinese could move to a basket of currencies peg that would cause the Yuan to automatically revalue vis-a-vis the US dollar if the US dollar falls against the euro and the yen.

Here, I am focused on China, but clearly other bilateral tensions would build. The Swiss, the Canadians, the South Koreans and the Brazilians would find their  currencies appreciating more than the euro or sterling for example. Emerging market countries may follow Brazil and South Korea’s examples in erecting capital controls then. But that still leaves a lot of room for trade friction.

Source: Dollar set for sharp decline, Goldman forecasts – Telegraph

  1. Financial_Servicer says

    I recall Goldman also forecasting the USD moving to parity with the Euro earlier this year when it was around $1.22 or so. You could take this forecast to mean it has just about reached the end of its move then I guess.

  2. Mo says

    Like Jim Rogers said ( everyone is bearish on the dollar. It could mean that it’s a little oversold – at least in the short term.

  3. Element says

    Edward, this thing has so many angles, here’s another;

    The Australian Dollar has become the world’s fifth most traded currency, and some suggest will become the 4th. A really quite incredible rise. The AUD hit a record 99.2 US cents overnight and seems very likely to exceed $1.00 USD in the near future (barring a global financial panic and record global trade collapse … which I personally think is very likely by mid-2011).

    As far as being a commodity currency, its pretty darned robust, for as soon as the AUD and commodities collapse, this injects a massive stimulus into Asia’s giants.

    But conversely, today, it’s imparting a massive anti-stimulus to China and especially Japan instead. The problem for Japan isn’t just that China is buying Yen or the USD is falling and the China-peg with it, or that the Euro is falling even faster than the USD, the real shock is that the AUD is so high and Commodities with it, so input prices for Japanese exporters is killing their competitiveness.

    It’s having a similar effect in China, with the Head of China’s state Iron And Steel Association on Sept 28 2010 squealing furiously about iron-ore prices, saying that it “wouldn’t be bullied into accepting unfavorable pricing systems”. It also said it “would not accept”, the iron-ore miners passing-on the cost of a new ‘Mining-Resources-Rent-Tax’. Then laughably, insisted that steel prices should dictate iron ore prices, not the other way around! (what planet do these guys come from?! Continuously developing massive new mines in literally undeveloped terrain costs big biscuits … apparently Beijing thinks it costs nothing and takes no time to do this.)

    The Iron ore miners could not contain their laughter and cheekily contra-suggested that if China wanted cheaper steel it should be making it in Australia, with cheaper transport costs and lower energy cost, then ship the steel to China. A fair and logical market solution but of course Beijing wants the domestic jobs and general economic activity. It doesn’t like the cost of subsidizing inefficient domestic steel mill operations to maintain those jobs.

    Coincidentally, China just completed a massive simultaneous national ‘seasonal’ shutdown of many of its steel-mills, “for maintenance”, over the Summer. This lead to a fall in export volume dip for iron and coal, and some reduction in ore prices (which was the whole aim of the exercise).

    This was Beijing central-planning attempting to hurt or scare the miners via the threat of withdrawing consumption. But it didn’t even look like working. The miners knew immediately what was going on. So Beijing is now getting all huffy because they again failed to get their way on price, thus volume and price rose again. Pushing Chinese steel and energy prices even higher once more.

    Beijing made an enemy out of Australia’s mining industry in July-2009 when they threatened to execute Rio Tinto’s iron ore price negotiator, Stern Hu, on trumped-up charges of “stealing state secrets”. In March to July 2009 China was literally demanding $37/tonne iron ore price contracts, as opposed to the $60/tonne price the rest of Asia would be paying in 2009-10 (a full 40% discount from the previous years contract), simply because China wanted to undermine and impair Japan and South Korean recoveries. Thus to maintain a dominant export potential into USA (who they then clearly believed had collapsed). So they insisted Australia play a role in harming Japan and other Asian States as though they had apparently assumed Kevin Rudd was their new mercenary. Wrong.

    And when that did not work Beijing literally would not even answer phone calls as the Australian Foreign Minister tried to contact Beijing to find out what the hell it thought it was doing.

    Instead, Canberra was forced to read official Chinese Govt internet sites to get any information at all about what was going on. And that totally killed the budding bilateral relationship stone-dead.

    None of that outrageously aggressive tyrannical behavior has been forgotten in Canberra. Or in the mining sector.

    So Beijing now claims it’s being economically ‘bullied’ by Australia?

    So now Beijing figure that if Japan is collapsed, via buying up the Yen, to achieve the same end, and the USA goes deeper into recession (and both into a longer depression) then China gets a lower AUD, and lower commodities prices and higher volumes, plus a more compliant mining sector.

    Then Beijing will demand that discount price contracts be re-instituted, at whatever price level they demand. And then they can dominate global exports and also Asia, in order to solidify its territorial and resource claims over an extended EEZ.

    Cute huh?

    What the central planning dumb-asses in Beijing don’t understand though, is that if this is a trade war, Australia’s miners can ultimately dramatically reduce export volume to China to push up its domestic prices, and can also offer special emergency price discounts to support for the rest of Asia that China has harmed in its economic attack, to help them to recover competitiveness against this Chinese behavior.

    And lets not forget Beijing calculates a Depressed Japan and USA mean falling Naval capability over time, and falling resolve. Anyone who thinks China is playing-nice or not aiming to do serious harm to Asian and the US economy is not looking at the facts of their actions, rather than the myths of their propaganda.

    The real question as I see it is; what can be done to ease this 24-month long Chinese attack on the Japanese economy and by extension on the US economy?

    As ABC’s economics and finance contractor Alan Kohler made the point today that a strong AUD dollar makes domestic imports more expensive and suppresses consumer import inflation so this may delay or even end interest rate rises in Australia for several months. He even predicts a saw-tooth move to $1.10 cents, given the USD is in secular weakening. He also said the prospects for both the USD and the US economy looked “very bad”.

    So, superficially, the little Aussie AUD rebel-alliance is winning against the evil USD Death-Star. Well, until the Shintos can’t afford AUD commodities input prices anymore and Nippon’s exporters completely tank (which seems to be occurring). Thus a big piece of the global economy and Australian trade goes with it.

    Just as China wanted.

    Plus everything the US is doing to lower its currency is exactly what Beijing wants (so do not expect any back-down from them).

    Yesterday there was lots of commentary in international media about ‘currency-wars’ and a fairly direct but still diplomatic warning from Tim Geithner to China, to raise its currency-peg, immediately.

    China’s Premier basically said this would, “socially and economically destabilize China”, and the world would regret such an outcome, so please shut up and stop irritating us.

    But I don’t think China understands that an economically and socially destabilized and outraged Japan and USA are both extremely dangerous to China’s interests. And a thoroughly disenfranchised Canberra can do China a LOT of economic damage.

    None of this behavior is going unnoticed.

    But they will find that out soon enough, if they keep up the economic attack. The economic attack on Japan and destruction of US competitiveness in order to grab 9 to 11% GDP growth, while others get -5% contractions is going to be far more destabilizing and dangerous to China than Beijing currently thinks. They made a huge (and extremely expensive!) strategic mistake in mid-2009 and they are making another one in 2010.

    As far as I’m concerned, Beijing has been engaged in nascent trade and currency war with Japan and the US since QTR2 2009 (and they were dumb and arrogant enough to entirely misread the situation, and to believe they could simply order Australia to help them crush what are Australia’s long-term strategic trade and geopolitical partners).

    Answer: severe Trade Tariffs must be imposed to kill Chinese exporters.

    That is the only way they will get the message to quit their attacks on Japan and the US. China wants to be top dog, its as simple as that. And they have no intention of waiting 50 years for it to happen (while the US is totally wasting its time, resources and attention on a virtually strategically insignificant minor Islamic terrorist network, China is making its moves).

    Trade Tariffs are what we’ll get either by about early Feb 2011, or soon after April’s QTR1 2011 US GDP is released. Bet on it.

    Frankly, I think people are crazy to buy AUD at the current levels as the AUD has a routine habit of dropping 30% or more during exogenous shock, so investing short-term right now is very high-risk. Longer-term its probably a safe bet though as a port in the economic storm, you just have to ride out the 30 to 40% decline that’s coming, and that may take several years.

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