The US dollar could be stronger for longer as the market hasn't priced in 3 key developments, Goldman Sachs says

The dollar could keep gaining as recent developments have yet to be taken into account by FX markets.
Goldman Sachs wrote in a note that persistent inflation could keep pushing the greenback higher.
It also cited global fiscal challenges and financial stability concerns as reasons for dollar strength.

The US dollar is poised to gain further strength after an already blistering rally in 2022, according to Goldman Sachs.

Analysts wrote in a note viewed by Insider on Monday that three factors including persistent inflation leading to more hawkish tightening from the Federal Reserve, coupled with fiscal challenges in the UK, and concerns over financial stability could keep the dollar stronger for longer.

And even as investors are cautious given "over tightening risks and foreign intervention," Goldman says that "recent
developments have also exposed a growing, and we think under-appreciated, tail risk that Dollar strength could prove more persistent despite a challenging valuation picture."

The bank outlined recent developments which include still-scorching inflation in the US and a resulting hawkish central bank, which remains an outlier because other central banks can't match the aggressive pace maintained by the Jerome Powell helmed Fed over growth concerns and "faster pass-through from rate hikes to financial conditions."

Goldman also noted "the challenging fiscal environment" best exemplified by the UK and the result of "policy missteps" which will add to the strength of the dollar. Goldman lastly discussed growing concerns over global financial stability which could add to an investor view of the dollar as a safe haven.

"Of course, lower energy prices would help solve a lot of these problems, and that is the biggest risk in the other direction," the note said.

"But, barring that, we think investors should continue to position for a more persistent Dollar cycle."

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