(Bloomberg) -- The downside risk to the US dollar posed by the Federal Reserve's coming interest-rate cuts is limited because other central banks are easing policy, too, according to an analyst from Goldman Sachs Group Inc.
In fact, such synchronized cycles of rate cuts are usually associated with a stronger dollar, the currency analyst, Isabella Rosenberg, wrote in a note to clients. She based that on an analysis of rate cuts since 1995 and the degree of policy coordination among the developed nations.
“If most central banks are easing together, we can expect that to limit the degree to which Fed easing will weigh on the dollar,” she wrote. “While the market is pricing a faster Fed pivot, we still think other central banks would ease policy more if the Fed gave them the space to do so.”
The Fed is expected to make its first rate reduction next week, joining the European Central bank, the Bank of England and and others that have already started easing policy.
The dollar has been under pressure lately as traders prepare for the Fed's first move, which in theory should weaken demand for the currency by giving investors less incentive buy US debt.
Such a dynamic has played out when the Fed has been out of sync with other major central banks, typically resulting in a weaker — or flat — dollar, Rosenberg said. But in this case, US rates remain relatively high and the drop in other countries saps some of the incentive to sell the dollar in order to buy assets elsewhere. Such coordinated global rate cuts can also signify economic-growth concerns that bolster the dollar, given its status as a safe haven.
“Explaining dollar performance using a single variable—the direction of Fed policy in this case—is not usually very successful,” she said. “Clearly, the relative backdrop for FX matters much more.”
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