07:28 AM EDT, 04/29/2024 (MT Newswires) -- Buying US dollar call options against interest rate sensitive currencies is the best way to hedge against the risk of further divergence between the Federal Reserve and other central banks, Goldman Sachs strategists said on Friday.

"Markets have begun to price more of a policy shift rather than just better activity data. This can lead to more disruptive Dollar moves against the cyclical, rates-sensitive currencies, as we saw in the middle of last year," Goldman Sachs strategists said.

"Investors should consider hedging against these risks with Dollar calls against rates-sensitive crosses in both DM (like AUD and SEK) and EM that were previously protected by the procyclical rotation but that would be more exposed in a "policy shock" environment," they added in a note to clients late on Friday.

Wednesday's Federal Reserve policy decision "will at the very least reiterate that the Committee is not feeling any more confident about the inflation outlook," which could reinforce the market's belief that the Fed is now likely to cut interest rates later than many other central banks in developed and emerging markets, potentially boosting the dollar.

The shift in relative market expectations for interest rates recently led Goldman Sachs to raise its forecasts in anticipation of a "stronger for longer" US dollar. Among other things, the new forecasts envisage EUR/USD falling to 1.05 in three-months time. GBP/USD is seen rising to 1.30 and USD/JPY is seen falling to 155. USD/CAD, meanwhile, is seen rising to 1.40.