(Bloomberg) -- The US dollar has more room to strengthen than the market is currently estimating, according to Goldman Sachs Group Inc. 

Credit conditions in the US have not tightened as much as feared initially, while activity in Europe and China has disappointed robust expectations from earlier in the year, Goldman analysts Michael Cahill and Lexi Kanter wrote in a note Tuesday.

“There is likely more room for dollar strength in the near term than what the market is pricing,” they wrote. “Ultimately, we think total dollar depreciation for the year is more constrained than commonly believed.”

A gauge of the dollar strength has gained more than 1% so far in May as markets adjust expectations for the timing of Federal Reserve rate cuts, with the debt-ceiling standoff also bolstering the currency’s haven appeal. That has followed two months of depreciation of the greenback.

“The dollar is likely to decelerate only slowly from the peak, with a number of bumps along the way, because slack in the economy remains limited so policymakers will have to keep one foot on the brake,” analysts at the bank said. “Dollar depreciation is typically associated with strong growth in the rest of the world, not weak growth in the US. We are still waiting for a challenger, and the euro is not stepping into the role yet.”

There are not enough factors to warrant the euro’s continued appreciation and policy paths of the Fed and the European are not that divergent, they said, maintaining their forecast for the common currency at 1.10 per dollar at the end of 2023.

The euro fell 0.4% to 1.0774 on Tuesday, after two days of advances. 

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