Goldman Reverses Euro Call, Sees Gains on Weak U.S. (Update1)

Goldman Reverses Euro Call, Sees Gains on Weak U.S. (Update1)
2010-07-15 05:16:17.980 GMT

(Adds Goldman comments on stress tests in sixth paragraph.)
By Candice Zachariahs
July 15 (Bloomberg) -- Goldman Sachs Group Inc. said the dollar will fall against the euro by January as U.S. growth slows, marking the bank’s second reversal in two months after it forecast in June the greenback would surge to a seven-year high.
The bank raised its outlook for the yen, expecting it to climb to the highest level since 1995 versus the dollar expectations recede for an interest-rate increase by the Federal Reserve and amid a lower likelihood of currency intervention from Japan’s policy makers. Goldman said the euro will move "notably lower" to 1.27 Swiss francs over three months on safe-haven flows out of the euro zone.
"Weaker U.S. growth, reasonably solid euro-zone macro data and less political/fiscal disruptions than feared have been a feature of the past few weeks," analysts including Thomas Stolper, an economist in London for Goldman, wrote in a report.
"This weakening in U.S. activity is the beginning of a period of sub-trend growth, spanning about four quarters until the second half of 2011."
The euro traded at $1.2745 as of 6:12 a.m. in London from
$1.2743 yesterday in New York. It traded at 1.3405 Swiss francs from 1.3414. The dollar was at 88.06 yen from 88.41 yesterday.

FOMC Minutes

Minutes of the Federal Reserve’s June 23 meeting showed policy makers were concerned about lingering high unemployment and risks that inflation may decelerate further in the world’s largest economy. If the outlook worsened, the Federal Open Market Committee would need to consider whether additional stimulus was appropriate, according to the minutes, which were released yesterday.
Goldman analysts said the euro may weaken this quarter as the popularity of some European governments falters and markets await the impact of stress tests on 91 of the region’s banks due July 23.
"We may need a few more months with strong activity data before we are willing to sound the all clear on European fiscal issues," the analysts wrote.
Goldman forecasts Europe’s single currency will fall to
$1.22 in three months before gaining to $1.35 in six months and
$1.38 in a year, according to an e-mailed research note dated July 14.
The bank’s six-month outlook takes it back to a position it reversed on June 9, when it predicted the single currency would drop to a seven-year low of $1.15 over three and six months from a $1.35 forecast earlier.
The bank forecasts the euro will fall to 1.27 Swiss franc in three months before recovering to 1.30 and then 1.33 over six months and a year.

Yen Strength

Goldman expects the dollar will breach this year’s low versus Japan’s currency, sliding to as low as 83 yen in six months from an earlier call for it to trade at 94 yen. The greenback will buy 85 yen in three months and 90 yen in 12 months, compared to earlier predictions for 92 and 98 respectively.
"The market is still pricing in too much for U.S. rates through end-2011 and as this is re-priced lower, it will likely push dollar-yen lower as well," the analysts wrote. "The Japanese economy has been able to recover much more quickly than expected, helped by strong exports to the rest of Asia."
Bank of Japan policy makers today kept interest rates unchanged at 0.1 percent and raised their growth forecast for the year ending March 2011 to 2.6 percent from 1.8 percent estimated in April.

Fed Rates

The Fed won’t raise its target rate until the second quarter of 2011, according to the median forecast in a Bloomberg News survey of economists. Both central banks have held rates steady since December 2008.
Concern among policy makers that a strong yen will hurt exporters and dent the nation’s economic recovery is unlikely to result in intervention in the currency markets, Goldman said.
Moves to sell the yen to limit gains may cause "frictions"
with a U.S. administration focused on promoting currency flexibility in Asia, particularly China, the analysts wrote.
"Any sharp move in dollar-yen would generate verbal intervention," the analysts said. "We don’t expect the administration to actively prevent yen appreciation for the time being."