Goldman Sachs is closing two long-dollar "top trade" calls, both of which would have posted losses, the bank said in a note.
In recent years the bank has generally maintained a bullish dollar view, and the greenback still has a number of things going for it, including a healthy domestic economy, an active central bank, and lower political uncertainty compared with the U.K. and euro area. However, a number of fundamentals have changed on the margin, such that the long-dollar story no longer warrants a place among Goldman’s ’Top Trades.’"
The trades, which it initiated in mid-November, were a long dollar plays against the euro and the pound as well as going long the dollar/yuan via a 12-month non-deliverable forward (NDF). The euro and pound trade had a potential return of negative 0.2 percent, with modest carry gains offsetting a spot return of negative 0.6 percent, while the yuan trade had a potential loss of 1.1 percent, Goldman analysts said.
The US dollar has lost to its G10 peers since the beginning of the year, with the yen benefiting the most. source: Bloomberg
The bank also cited three reasons that the trades didn’t work out, adding that he expected all three would remain dollar headwinds.
First, global economic growth had picked up, reducing the U.S. economic outperformance, he noted, citing gross domestic product (GDP) forecasts for G-10 countries since the U.S. presidential election in November. Although forecasters have marked up their U.S. growth expectations over this period, the changes have been more modest than for other economies, including the U.K. and Euro area.
Goldman also pointed to U.S. President Donald Trump’s recent rumblings on dollar strength. Last week, Trump said the currency was "getting too strong" in an interview with The Wall Street Journal.
The third headwind to a long dollar trade came from less-hawkish expectations for tightening from the U.S. Federal Reserve. Earlier this month, a summary of the Federal Open Market Committee meeting held in March, during which the group approved a quarter-point hike in its benchmark interest rate target, indicated that officials would begin shedding some of the $4.5 trillion in bonds it holds on its balance sheet this year.
To conclude, Goldman doesn’t see a much stronger dollar in the near future. The currency may have peaked and as long as the FED doesn’t speed-up with its hikes, more gains are not expected.