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as the federal reserve is about to cut interest rates, the global economy faces increased uncertainty and the market is paying close attention to the future trend of the us dollar.

a research report recently released by goldman sachs pointed out that historical data shows that the performance of the us dollar during the federal reserve's interest rate cut cycle is not static, but is affected by the policies and economic conditions of other major economies in the world.

goldman sachs divided the interest rate cut cycles from 1995 to 2020 into two categories: "coordinated" and "uncoordinated", and found that coordinated interest rate cut cycles are generally more favorable to the us dollar, while uncoordinated cycles are unfavorable to the us dollar.

in the past three months, many g10 central banks have begun to ease monetary policy. goldman sachs believes that this can form a relatively coordinated global interest rate cut cycle, which will help alleviate the downward pressure on the us dollar from the fed's interest rate cut.

historical performance varies, and the trend of the us dollar is unpredictable

goldman sachs' analysis shows that there is no uniform pattern in the performance of the dollar during the seven fed rate-cutting cycles since 1995. in some cycles, the dollar has performed strongly, while in others, the dollar has weakened.

the traditional dollar "smile curve" theory holds that the dollar performs better under two extreme circumstances: either the global economy is very bad (the dollar strengthens as a safe-haven currency) or the us economy performs very well (capital flows back to us dollar assets).

but goldman sachs believes that despite the dollar's safe-haven status, its performance in the face of slowing u.s. economic growth depends on the conditions of other economies around the world. if growth in other economies remains solid, the dollar may not strengthen due to u.s. economic problems.

goldman sachs uses the trend of the us dollar from late 2007 to early 2008 as an example:

in late 2007 and early 2008, the u.s. economy slowed and the dollar weakened. this was because economic growth in other parts of the world was relatively strong at the time, and the market believed that the u.s. economic problems were mainly domestic problems and had not spread to other regions.

global policy coordination is key, and the performance of the us dollar changes with the situation

goldman sachs classified each rate-cutting cycle from 1995 to 2020 as "coordinated" or "uncoordinated," meaning that if at least four other g10 central banks began cutting rates within six months of the fed, the cycle was coordinated. otherwise, the cycle was considered uncoordinated.

the research report particularly emphasizes the importance of policy coordination among the central banks of the g10 countries. goldman sachs said: in a policy-coordinated rate cut cycle, the us dollar tends to outperform other g10 currencies; while in a policy-uncoordinated cycle, the us dollar may be relatively weak.

in the past three months, several g10 central banks have eased monetary policy, and the market expects the fed to accelerate its shift to easing policies in the near future. currently, the market's expectations for a 25 basis point rate cut by the fed next week have increased, while expectations for a sharp rate cut have weakened. however, more and more traders are preparing for a 150 basis point rate cut in january next year.

goldman sachs pointed out that other central banks may continue to relax policies after the federal reserve starts cutting interest rates, thus forming a relatively coordinated global interest rate cut cycle.

against this backdrop, some g20 currencies such as the british pound have stood out. while the british pound has benefited primarily from improved risk from global easing, the reduction in the bank of england's easing policy should be somewhat positive for the currency.

goldman sachs pointed out that the u.s. economy has higher growth standards than other countries, which may reduce the downward pressure on the dollar from the fed's interest rate cuts.