Goldman Sachs asks clients to buy dollar, but Morgan Stanley says to go slow

Goldman Sachs is telling clients to buy the dollar as the market under prices the odds of a Federal Reserve interest-rate increase this year.

Morgan Stanley says not so fast.

The US currency has rallied since the Labor Department released a stronger-than-forecast payroll report on August 5, reviving traders’ bets on a centralbank move.

Robin Brooks, Goldman Sachs’ chief currency strategist, said on Monday that the likelihood of a rate hike by the year-end is 75 per cent, up from 65 per cent, and higher than what markets are predicting.

Hans Redeker, Morgan Stanley’s chief global currency strategist, said the employment gains won’t be enough to raise US inflation expectations. “We remain structural dollar bulls, given our view that the Fed will ultimately hike more than markets are pricing,” New Yorkbased Brooks and Michael Cahill wrote.

“The big game in town remains how the Fed behaves into the end of the year.” Goldman Sachs is world’s seventh-largest currency trader, according to Euromoney magazine. The Fed speculation revives a scenario where the US central bank moves toward tightening policy as other central banks add stimulus to bolster flagging economies, such as the Bank of England, which cut rates last week for the first time in seven years.

With the dollar down almost 4 per cent this year, traders will watch for signals when Fed Chair Janet Yellen speaks later this month at a meeting of policy makers in Wyoming. Dollar “support is unlikely to last long, as the Fed may have no intention of allowing real rates to rise pre-emptively,” Morgan Stanley’s London-based Redeker wrote in a note.