Goldman Sachs expects dollar decline, interest rate cut


By Ye Xie
Bloomberg News Service
Friday, August 24, 2007

NEW YORK -- The dollar may decline to a record low against the euro in the next six months because U.S. economic growth will slow, forcing the Federal Reserve to cut interest rates, according to Goldman Sachs Group Inc.

From the current level of $1.3568 per euro, the U.S. currency will weaken to $1.43 per euro in the next three to six months, Goldman Sachs said in a research note yesterday. New York-based Goldman, the world's biggest securities firm by market value, lowered its dollar forecast from a prior estimate of $1.35. The dollar set a record low of $1.3852 per euro on July 24.

Concern about losses in investments related to mortgage securities has bolstered expectations that the Fed will cut its benchmark interest rate from 5.25 percent at its Sept. 18 policy meeting. Traders are certain that the Fed will cut its key rate to at least 5 percent by Sept. 18, futures show.

"Financial conditions are tightening at a time when clearly there's some downside risk to growth," said Jens Nordvig, a senior currency strategist at Goldman Sachs in New York. Fed rate cuts "will drag the dollar lower."

The Fed will lower its benchmark interest rate by 0.75 percentage point to 4.5 percent by year-end, according to Goldman Sachs.

The dollar will fall also because foreign investors will reduce purchases of higher-yielding corporate bonds, said Nordvig.

Goldman also said the dollar will decline to 110 yen in the next three to six months, from 116 yen at present, compared with a previous forecast of 118 yen.

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