Dollar to Slide to $1.55 Versus Euro, Goldman Says

By Candice Zachariahs

Oct. 15 (Bloomberg) -- Goldman Sachs Group Inc. said the dollar is likely to extend drops against the euro and commodity- backed currencies over the coming six months, based on the greenback’s correlation with cyclical assets and capital flows.

The dollar will weaken to $1.55 versus the euro in three and six months, the bank said, revising previous forecasts of $1.45 for both periods. The U.S. currency, which has fallen versus all of the 16 most-traded currencies this year, will recover to $1.35 in 12 months, Goldman Sachs said. The bank left its dollar-yen forecasts unchanged.

“It now looks as though the dollar trough will be slightly deeper,” analysts including Thomas Stolper in London, New York- based Mark Tan and Hong Kong’s Fiona Lake wrote in a note to clients yesterday. “The underlying longer-term view is that the dollar is undervalued and will recover somewhat.”

The currency fell to $1.4953 versus the euro as of 12:27 p.m. in Tokyo after touching $1.4960, the weakest since August 2008. It has declined 7 percent against Europe’s single currency this year.

The U.S. dollar will begin to recover some ground over 12 months as household savings rise and foreign investors regain confidence in the U.S. economy, Goldman Sachs predicts.

“We don’t expect the euro to make significant new historical highs above $1.60,” the analysts wrote. “In fact, we would expect policy makers to become very vocal about excessive dollar weakness when we approach these levels.”

‘No Alternative’

European Central Bank President Jean-Claude Trichet said Oct. 8 that a strong dollar is “important,” repeating previous remarks. Toyoo Gyohten, an adviser to Japan’s finance minister, said the same day there is “no better alternative to the dollar.” Bank Rossii First Deputy Chairman Alexei Ulyukayev said Sept. 29 that Russia will keep buying Treasuries because there’s no realistic alternative.

Still, the U.S. dollar weakened as global equity markets rallied and the Treasury sold a record amount of debt to finance a budget deficit that totaled $1.4 trillion in the fiscal year ended Sept. 30.

Goldman Sachs now expects the Canadian dollar to reach parity with its U.S. counterpart in three months before falling back to C$1.08 versus the dollar in 12 months.

The Australian currency will peak at 95 U.S. cents and Brazil’s real will trade at 1.65 to the dollar in three months, it said, compared with a previous call for 87 cents and 1.80. New Zealand’s kiwi will trade near current levels for the next six months before declining to 70 cents in a year.

The Canadian and New Zealand dollars climbed to the most since July 2008 today, trading as high as C$1.0208 and 74.84 U.S. cents respectively. Australia’s dollar rose to as much as 74.84 U.S. cents, the strongest since August 2008. The real yesterday was at 1.7009 per dollar.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net.