Key Points：
- Goldman Sachs cautions that the Federal Government’s expanding tariff policies and decelerating GDP growth are undermining the U.S. dollar’s global strength.
- The bank forecasts the dollar will depreciate by approximately 10% against the euro and 9% against the Japanese yen and British pound over the next 12 months.
- Foreign investor demand for U.S. assets is waning, driven by policy uncertainty and reduced returns on American investments.
- Higher import costs from tariffs could further erode corporate profits and real consumer incomes, pressuring the dollar downwards.
- A weaker dollar may ultimately narrow the U.S. trade deficit, but could also fuel domestic inflation and import-price shocks.
The Tariff-Growth Nexus: Eroding Dollar Dominance
In its latest research report, Goldman Sachs underscores the dual impact of aggressive U.S. tariff measures and slowing economic expansion on the dollar’s reserve‑currency status. The bank’s economists argue that as tariffs push up the cost of imported goods, foreign suppliers gain pricing power, forcing U.S. businesses and consumers to shoulder higher expenses. This dynamic weakens America’s terms of trade and, in turn, diminishes global confidence in the dollar.
Michael Cahill, the firm’s Senior FX Strategist, explains:
“Historically, the dollar’s strength has been underpinned by America’s superior investment returns. However, if tariffs compress profit margins and erode real incomes, this core support for the dollar will recede.”
As a result, Goldman Sachs projects that over the next year, the dollar will trade 10% lower versus the euro, and roughly 9% lower against both the Japanese yen and British pound.
Foreign Investors Retreat: Policy Uncertainty Takes its Toll
Data cited by the report shows that foreign investors have already withdrawn sizeable sums from U.S. equities and bonds. In just two months, global institutions sold roughly $63 billion in American stocks, highlighting a pronounced shift in capital flows away from U.S. assets.
Jan Hatzius, GS’s Chief Economist, notes that this trend reflects broader concerns about the consistency and predictability of U.S. economic policy:
“A lack of policy coherence—particularly around trade—deters long-term foreign investment, compounding the downward pressure on the dollar.”
Without foreign inflows to finance growing federal deficits, the dollar’s vulnerability grows. A sustained pullback in overseas funding could even precipitate a U.S. funding crisis, according to GS analysts.
Mechanisms of Depreciation: From Tariff Costs to Trade Deficits
Goldman Sachs delves into the mechanics by which tariffs transmit into currency weakness. When essential imports face high levies, there are few readily available substitutes, which bolsters foreign suppliers’ leverage and raises U.S. import costs. The resulting deterioration in trade terms impels the dollar to weaken, rebalancing purchasing power.
Hatzius draws parallels to past episodes:
“Comparable periods in the mid‑1980s and early 2000s—when the dollar was similarly overvalued—preceded 25–30% depreciations. We see those patterns repeating as investor sentiment shifts.”
This downward adjustment, while potentially reducing the U.S. trade deficit by making exports cheaper, may also exacerbate inflation by raising domestic prices for imported goods.
Broader Market Implications: Inflation, Trade, and Policy Responses
A weaker dollar carries mixed consequences for the U.S. economy. On one hand, more competitive export prices could stimulate manufacturing and narrow the trade balance. On the other hand, higher import prices risk stoking inflationary pressures, which could prompt the Federal Reserve to reconsider its interest‑rate path.
Goldman Sachs economists estimate a 45% probability of recession by year‑end, driven in part by declining business confidence and tariff‑induced cost shocks. Yet, equity markets have so far shrugged off these warnings, with the S&P 500 climbing over 10% in recent weeks—a disconnect that GS warns may reverse as tariff effects deepen.
Looking Ahead: Monitoring Key Indicators
Goldman Sachs recommends closely watching several data points to gauge the dollar’s trajectory:
- Foreign Portfolio Flows: Continued net selling of U.S. equities and bonds will signal eroding confidence.
- Import Price Indices: Sharp upticks in import costs would confirm tariff pass‑through to domestic prices.
- U.S. PMI Data: A rebound in Purchasing Managers’ Index figures may presage an inventory restocking cycle, offering temporary relief.
- Federal Reserve Policy Statements: Any pivot toward tighter monetary conditions in response to inflation could bolster the dollar, while dovish shifts would further weaken it.
Conclusion
Goldman Sachs’s latest warning highlights a pivotal juncture for the U.S. dollar. With tariffs inflating import costs and growth decelerating, the dollar’s historical underpinnings are under siege. A projected 10%–9% depreciation against major currencies reflects the severity of these twin headwinds. As foreign investors retreat and domestic price pressures mount, policymakers face the delicate task of balancing trade, inflation, and growth considerations. For investors and businesses alike, staying attuned to shifts in capital flows, import prices, and central‑bank signals will be crucial as the dollar navigates this period of policy‑driven uncertainty.
