Sterling among most vulnerable currencies as Goldman Sachs tips broadening dollar strength

Sterling is one of the most vulnerable major currencies to a broadening wave of dollar strength, Goldman Sachs has warned, compounding the pressure already building from the UK’s political crisis and surging gilt yields.

The bank’s currency strategists named the pound alongside the euro and Swedish krona as their preferred targets for bets on dollar appreciation, adding an external headwind to a currency already under strain from domestic turmoil.

Goldman said the US dollar is quietly strengthening beneath the surface despite appearing weak on headline measures.

The trade-weighted dollar index, the most commonly cited gauge of the greenback’s value, has been distorted by the AI-driven rally in US tech stocks, which has also lifted tech-heavy Asian markets whose currencies carry significant weight in the index.

Strip out that effect and the picture changes. Measured against a simple average of 31 currencies, the dollar has been appreciating steadily since late February, with the heaviest selling concentrated in currencies that carry little or no weight in the trade-weighted index, including the Philippine peso, Indonesian rupiah, Indian rupee and Chilean peso.

Goldman said dollar strength is likely to continue building for two reasons.

First, active intervention by central banks in Japan and India to prop up their currencies has artificially suppressed the dollar, and the bank is sceptical that such intervention can be sustained without a fundamental shift in the economic backdrop.

Second, the combination of rising inflation and relatively resilient US growth has kept American interest rates higher for longer, making the dollar more attractive to hold. Any further escalation of the energy shock from the Iran war would reinforce that dynamic by shifting the terms of trade further in favour of the US, the world’s largest oil producer.

Goldman said that on days since the war began, when oil prices rose, and stock markets fell, every major developed-world currency weakened against the dollar, with the Swedish krona, Japanese yen and Canadian dollar among the hardest hit.

If risk appetite holds up, Goldman expects a divided currency market to persist, with commodity exporters’ currencies outperforming while rate-sensitive importers, including the UK, lag behind.