U.S. Dollar Forecast for 2020: HSBC and Goldman Sachs Analysts Give their Verdict

Goldman Sachs headquarters, New York. © Ludovic Bertron, Flickr, reproduced under CC licensing

- Goldman Sachs see slightly softer USD in 2020

- HSBC say USD remains the currency to own

- China & U.S. striking a trade deal seen as a 'game changer'

Investment bank Goldman Sachs say they are forecasting a modestly weaker Dollar in 2020, while analysts at HSBC - the UK's largest lender - say the Dollar is likely to remain the currency to own for the foreseeable future.

Both however say their views on the Greenback are at risk of an unexpected U.S.-China trade deal being delivered at some point in coming months.

"Despite improving investor risk appetite we see only modest downside for the U.S. Dollar in 2020 because the American economy still looks much sturdier than China or Europe. However, FX markets should be anything but dull, with plenty of opportunity to collect carry, and to position for macroeconomic divergence and major political events," says Zach Pandl, a currency strategist with Goldman Sachs in New York.

The predictions come as foreign exchange analysts lay out their expectations for 2020, following what has been another year of strength for the U.S. Dollar.

The currency has appreciated against six of the world's top nine freely-traded currencies, with only the Canadian Dollar, Pound and Yen ekeing out gains against the Greenback thus far in 2019.

Above: Relative performance of the Dollar in 2019, image (C) Pound Sterling Live.

However, growing expectations for a resolution to the U.S.-China trade war over recent weeks have seen global stock markets rally, and the Dollar has in turn given back some of its recent gains, leading many in the market to question whether the Dollar's rally is coming to an end.

The Dollar index - a measure of broad-based Dollar strength according to its performance against a basket of currencies - shows it has been climbing since 2018. However, a top in the rally has been reached over recent weeks, coinciding with investor optimism:

The topping in the Dollar's rally comes as market expectations for a 'phase 1' deal to be reached between the U.S. and China have grown of late, with authorities in China and the U.S. suggesting something might be signed by Christmas, or early 2020.

"When risky assets are moving up the U.S. Dollar tends to fall. Likely for this reason, sentiment around the Dollar has turned increasingly bearish as global equities have made new highs," says Pandl.

But, Goldman Sachs say there are two angles with which to approach the Dollar; from a domestic angle and an international angle.

Economists at the Wall Street bank are expecting global growth to recover somewhat in 2020, this should create an environment for a softer Dollar in international markets.

However, the 'domestic Dollar' should remain firm, with Goldman Sachs expecting a U.S. growth rebound to outperform any similar rebound in economic activity in China and Europe.

"Over the near-term the U.S. economic backdrop looks significantly sturdier than that of two of its largest trading partners," says Pandl. "We think the balance between the domestic and international drivers of the Dollar point to only mild depreciation on a trade-weighted basis of about 1.5-2.0% in 2020."

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HSBC say Dollar Remains Currency to Own Unless China and U.S. Strike a Deal

Asked what it would take to deliver a persistently lower U.S. Dollar in a recent interview on Bloomberg News, David Bloom, Global Head of FX Strategy at HSBC said the Dollar will struggle if China and the U.S. finally settle their trade dispute:

"I think a full-blown deal with China will be a game changer... that would change everything.

"Then I think obviously the Renminbi will stay pretty stable as it does, risk assets will rally, you've got alternative to the Dollar, the world looks like a much better place as peace is broken out and that would be a game changer."

Bloom however says those watching the currency market should not hold their breath in anticipation of a trade deal being struck anytime soon.

"In the meantime the Dollar will power ahead, the Dollar is the currency to own," says Bloom.

Pandl at Goldman Sachs holds a similar view on the Dollar regarding trade negotiations, saying risks to the Dollar are arguably skewed to the downside.

"We would pivot to a more bearish outlook if we were to see (i) a more robust recovery in the Euro Area, (ii) a bigger rollback of tariffs on China, and/or (iii) more rate cuts from the Fed," says Pandl.

Goldman Sachs forecast the Euro-to-Dollar exchange rate to trade at 1.15 on a 12 month horizon, with the Pound-to-Dollar exchange rate reaching 1.37.

The Australian-to-U.S. Dollar exchange rate is forecast to trade at 0.70 on a 12 month Horizon, with the New Zealand Dollar buying 0.67 in the same period.

The U.S. Dollar-to-Canadian Dollar exchange rate is forecast at 1.30 in 12 months.

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