Goldman Fund Manager Sees Dollar Rising 10% Versus Yen, Euro

(Bloomberg) -- The dollar is set to strengthen about 10 percent against the yen and euro as the Federal Reserve raises interest rates at least two more times this year, according to Goldman Sachs Asset Management.

Treasury 10-year yields will climb by about 50 basis points in the “medium term” as a healthy U.S. economy convinces policy makers to keep pushing rates higher, said Philip Moffitt, Asia-Pacific head of fixed income at the money manager, which oversees more than $1 trillion.

“The U.S. is still in very good shape,” Sydney-based Moffitt said in a telephone interview last week. “Our strategy is to have smaller positions based on our long-term view and try to hold on to them and then add when we think we get an opportunity.”

The dollar has been a barometer of faith in President Donald Trump's ability to bolster the U.S. economy. The currency surged following his election victory in November on his pledges to cut taxes and spend more on infrastructure, before erasing almost all those gains as political turmoil in Washington clouded his agenda.

The U.S. currency has dropped 5.1 percent against the yen this year and 5.9 percent versus the euro. It was at 110.98 yen and $1.1173 per euro at 10:53 a.m. in Tokyo on Wednesday.

Fed officials at their meeting this month signaled they are still on track to raise rates twice more this year, describing a first-quarter slowdown in the economy as “transitory.”

‘Stronger Dollar'

An index that Goldman Sachs uses to gauge the impact of financial markets on the economy has fallen this year, and is now much weaker than the Fed desires, Moffitt said.

“That means that they'll want to see higher rates and a stronger dollar, or some combination of those,” he said. “We're betting on both those things.”

The benchmark Treasury 10-year note yielded 2.22 percent, down from its 2017 high of 2.63 percent set on March 14.

Goldman Sachs Asset Management has used the recent decline in Treasury yields to position its portfolio for higher Fed rates, Moffitt said. “Short duration or yield-curve steepeners are our favorite sorts of trades in the U.S. in particular.”

Moffitt said the money manager is also betting on declines in Asian currencies, including the South Korean won and Taiwan dollar, because of the nations' exposure to China and their relatively low interest rates.

While investors expect stability in China before the Communist Party's twice-a-decade National Congress scheduled for later this year, the regulatory clampdown on the shadow banking system has caused unease about its economic outlook, according to Moffitt.

“That's raising some risk that there's a policy error in China,” he said.

To contact the reporter on this story: Netty Ismail in Singapore at nismail3@bloomberg.net.

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Nicholas Reynolds, Shikhar Balwani