On May 23, 2025, the Securities Times reported that a month ago, after US President Trump launched a global tariff war, Michael Cahill, a senior currency strategist at Goldman Sachs Research, had released a report warning that US tariffs might lead to the depreciation of the US dollar. Despite a temporary “truce” in the Sino-US trade dispute and slight improvements in the US trade and economic outlook, Goldman Sachs still maintains a bearish expectation for the US dollar for the remainder of 2025.
Reasons for the Bearish Outlook
Goldman Sachs analysts identified two major factors that continue to weigh on the US dollar:
Structural Shift in US Trade Policy: Despite lowering its assumptions about US tariff rates following progress in the Sino-US talks in Geneva, Goldman Sachs warns that the US trade regime remains highly protectionist. The tariffs are expected to suppress real incomes and squeeze corporate profit margins, leading to persistent economic uncertainty. This uncertainty may further dampen investment and pricing decisions, limiting the attractiveness of the US dollar.
Global Asset Reallocation: The trend towards greater diversification into non-US assets has become increasingly evident. Despite recent improvements in US stock market returns, Goldman Sachs believes that US stock valuations are not low, and that assets outside the US offer greater return potential, supporting capital flows into non-US dollar assets. Additionally, the unpredictability of the Trump administration’s policies further encourages global investors to reduce their investments in the US dollar and US dollar-denominated assets.
Market Implications
Foreign Investor Behavior: Foreign central banks are reducing their reliance on the US dollar, and private investors may soon follow suit. This shift is driven by the need to reassess risk exposure in a changing macro and policy environment.
US Asset Performance: The weak performance of US assets has led to some temporary but active withdrawals from US assets. This trend is expected to continue as investors seek better returns and diversification outside the US market.
Forecast
Goldman Sachs predicts that the US dollar will continue to weaken in 2025, driven by lingering trade policy uncertainties and the trend of global portfolio rebalancing. Specifically, the US dollar is expected to fall by 10% against the euro and by 9% against the yen and the pound within the year.
Conclusion
The strength of the US dollar is expected to gradually diminish as foreign investors reassess their exposure in an evolving macro and policy environment. This bearish outlook on the US dollar underscores the significant impact of trade policies and global asset reallocation trends on currency markets.
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