Goldman Knows Just What’s Needed To Pull The Rug Out For ‘King Dollar’

For the dollar to fall sustainably, the Fed will have to cut more aggressively than policymakers are likely to countenance.

That’s the message from a new Goldman note out Thursday morning, which cites the greenback’s safe-haven appeal and the rate differentials pillar (what Donald Trump was complaining about on Wednesday in his tweet about “the spread”) in explaining why the dollar likely won’t roll over absent a determined Fed.

“The global risk backdrop has weakened over the past couple of weeks from an already-fragile place”, the bank wrote, before asking “what might it take to see the broad Dollar weaken in an arguably favorable environment for flight-to-quality flows [given] rising policy uncertainty, slowing global growth, and our expectations for Fed easing already roughly in line with market pricing through year-end”?

The “problem” – if that’s what you want to call it – is that the dollar tends to move inversely to global growth, appreciating when growth falters, and depreciating when it perks up.

This dynamic is exacerbated when the US economy is outperforming the rest of the world, as it is right now. That is at the center of what we’ve variously described as President Trump’s “dollar insanity loop” – he wants the US to outperform other countries economically, but he doesn’t want the dollar strength that, all else equal, would be expected to accompany that outperformance, especially when US yields are comfortably positive (for now) versus deeply negative in Europe and Japan.

So, it falls to the Fed to fight a currency war via competitive easing.

“We find only seven meaningful episodes in the past four decades when the Dollar weakened as global growth ran below trend [and] in five of those seven episodes, the US 2-year trade-weighted rate differential narrowed by at least 10 basis points”, Goldman goes on to write, adding that “the rate compression was typically driven by substantial Fed easing relative to other major central banks, such as rapid policy rate cuts in 2002 and QE3 in late-2012”.

(Goldman)

If that sounds familiar to you, that’s because renowned FX strategist Donald J. Trump, of 1600 Penn. Asset Management fame, put out a similar (albeit shorter) note to the same effect on Wednesday.

“Our problem is with the Fed. Raised too much & too fast. Now too slow to cut”, strategist Trump remarked, on the way to noting that “Spread is way too much as other countries say THANK YOU to clueless Jay Powell”.

What FX strategist Trump didn’t mention is that his presidential self in the Oval Office is contributing to the “problem” by fostering safe-haven flows with manic policy U-turns and an increasingly adversarial stance on global trade and commerce.

But wait, there’s more. The irony of ironies is that the president’s efforts to force Fed cuts by stoking uncertainty have contributed to market pricing that is virtually impossible for Jerome Powell to “out-dove” (so to speak). That means that even if the Fed were to cut by 75bps between now and January, it likely still wouldn’t be enough to bring about a sustained drop in the dollar.

Fortunately, America’s “deplorable” fiscal position combined with the negative policy rates and Treasury yields that will probably accompany the deep recession he’s bringing on himself will be just the thing to get Trump the precipitous dollar drop he wants.

Of course, he’ll probably be carried out of the White House and institutionalized once the US economy careens into a depression and the Dow falls 45%, so he won’t get to enjoy the “tremendous” benefits of a debased reserve currency.

“#Sad!”