Goldman Sachs Research expects the US dollar to weaken as trade tensions, policy uncertainty, and slowing GDP growth weigh on investor confidence and foreign demand for US assets.
“The US dollar’s weakness against its major peers during the first quarter of 2025 is anticipated... to persist,” with GS forecasts of a 10% drop against the euro and 9% declines versus the yen and pound.
GS noted “We have previously argued that the US’s exceptional return prospects are responsible for the dollar’s strong valuation. But, if tariffs weigh on US firms’ profit margins and US consumers' real incomes, they can erode that exceptionalism.”
The report notes deteriorating sentiment toward US assets due to “consumer boycotts of US goods” and a fall in inbound tourism after tariff announcements, all weighing modestly on GDP.
“The combination of much stronger-than-expected foreign spending plans and weaker US asset performance has already led to some brief but active rotation out of US assets.”
Foreign central banks are reducing dollar reliance, and Goldman warns private investors may soon follow: “It is possible that the broader policy disruptions and eroded exceptionalism will see private sector investors follow a similar pattern now.”
Tariffs and FX implications:
Goldman notes the nature of current tariffs — broad and unilateral — may shift the economic burden to the US:
“US businesses and consumers become the price-takers... it is the dollar that needs to weaken to adjust if supply chains and/or consumers are relatively inelastic in the short term.”
On a proposed 10% universal tariff: “This is far from guaranteed, but it is newly possible... The dynamics at play in the latest trade tensions at least open new possibilities relative to Trump’s first administration.”
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This is via a note from late last week ICYMI.
DXY is a USD index, update:
This article was written by Eamonn Sheridan at www.forexlive.com.