Investing.com – As the global economy faces uncertainty, the United States appears to be on track for a “soft landing,” a scenario in which the economy slows without entering a recession.
This potential outcome, according to analysts at Goldman Sachs, is consistent with the weakness of the US economy. “Despite recent market turmoil, the US economy appears to be on the cusp of a soft landing, and the Fed is likely to deliver its first non-recessionary rate cut in September,” the analysts said.
This political move is expected to help stabilize the economy without slipping into a full-blown recession.
The term “soft landing” refers to a situation in which economic growth slows enough to curb inflation but not so much that it leads to a recession.
Historically, achieving such an outcome has been difficult, but current economic indicators suggest that the United States may be able to manage this delicate balance.
Analysts at Goldman Sachs point to a unique development in the current economic environment: The recent recovery in risk sentiment has been accompanied by a weaker dollar, not a stronger one, as has been the case in previous periods of strong performance for U.S. stocks. This shift has added momentum to the “soft landing, weak dollar” trade.
Several factors contribute to this scenario. Potential interest rate cuts by the US Federal Reserve are an important driver, as it can adjust real interest rates more quickly than other central banks that face downside risks to growth.
When these rate cuts are seen as part of policy normalization rather than a response to recession, they tend to support stock markets. In turn, this rise in stock prices, along with an improved global growth outlook and positive risk sentiment, usually puts downward pressure on the dollar.
Goldman Sachs also points out that the dollar’s relationship to U.S. growth is more relative than absolute.
The dollar does not always strengthen when U.S. growth is strong, nor does it always weaken during periods of weak growth. Rather, the dollar’s performance is closely tied to how U.S. growth compares to growth in other major economies.
For example, when U.S. growth is negative while the rest of the world is experiencing positive growth, the dollar tends to weaken. This relationship underscores the importance of considering global economic conditions when assessing the dollar’s path in response to U.S. economic data.
“Especially now, we caution that the dollar is generally as sensitive to relative equity performance as it has been to relative rates this year,” the analysts said. When U.S. stocks lead global equity outperformance, the dollar tends to strengthen.
However, in the current environment, where the Fed is expected to ease monetary policy while US stocks remain strong, this dynamic may limit the extent of the dollar’s decline.
The current valuation of the dollar is in part a reflection of the higher returns that US assets offer over an extended period of time.
This has attracted significant foreign investment, with nearly 30% of cross-border assets being allocated to the United States. This demand has been supported by the high valuation of the dollar, making it less vulnerable to rapid depreciation.
However, with the US approaching a potential soft landing, the combination of monetary policy easing and strong stock markets could create the conditions for a gradual weakening of the dollar.
Analysts at Goldman Sachs warn that while the dollar may face downward pressure, this process is likely to be gradual, as the dollar’s high valuation provides protection against rapid declines.