According to a Goldman Sachs analyst, the US dollar is expected to remain strong despite upcoming Federal Reserve interest rate cuts, as other central banks are also easing their monetary policies in a synchronized global rate-cutting cycle.
Synchronized Central Bank Policies
The global rate-cutting cycle has become increasingly synchronized, with over half of the world’s advanced economy central banks already initiating rate reductions. This coordinated approach to monetary policy is expected to have significant implications for economic growth and financial markets. Historically, such synchronized rate cuts have led to improved global economic activity, with the manufacturing Purchasing Managers’ Index (PMI) typically rising from around 50 to near 55 within nine months of the rate cuts.However, the cycle is not uniform across all economies, as evidenced by the European Central Bank’s recent decision to maintain its deposit facility rate at 3.75%. Despite this, markets are pricing in high probabilities of rate cuts from major central banks, including a 96% likelihood of a Federal Reserve cut in September. This synchronized easing is expected to support global growth and potentially favor international stock market performance.
Impact on Global Commodities
Commodity prices are likely to benefit from the anticipated global rate-cutting cycle, with Goldman Sachs projecting attractive total returns of 15% by year-end for the sector.Lower interest rates tend to support commodity prices through several channels, including increased demand, lower cost of carry and storage, and improved import purchasing power via favorable exchange rates against the US dollar. Historically, materials have rallied when interest rates have been lowered in a non-recessionary environment, with copper and gold being the biggest metal beneficiaries. However, the impact may vary across different commodities. While industrial metals like copper and aluminum have seen strong price gains recently, they may face a short-term correction before benefiting from the rate cuts. Oil prices, meanwhile, are expected to remain rangebound between $80 and $90 per barrel in the coming months due to ample supply and sluggish demand recovery.
US Dollar as Safe Haven
The US dollar has long been considered a safe haven currency due to its stability, liquidity, and the strength of the American economy. During times of global economic uncertainty or market turmoil, investors often flock to the dollar as a store of value and a hedge against risk. The dollar’s status as the world’s primary reserve currency, held by most central banks and financial institutions, further reinforces its safe haven appeal. This role was evident during crises like the 2008 global financial crisis and the COVID-19 pandemic, where the dollar appreciated against other currencies. However, some experts argue that the dollar’s safe haven status could potentially be challenged in the future by factors such as significant economic instability, high levels of debt, or shifts in global economic structures. Despite these potential risks, the dollar’s deeply entrenched role in the global economy and financial markets continues to make it a preferred safe haven for many investors during turbulent times.
Source: Perplexity
