The recently projected US dollar drop Goldman Sachs predicts that it is actually causing some serious ripples through the financial markets. The US dollar is projected to fall by about 10% against the euro and about 9% against both the Japanese yen and the UK pound over the next 12 months, according to the investment bank. This valuation comes amid growing trade tensions and the various policy uncertainties currently affecting global currency dynamics.
The US Dollar’s weaknesses: key drivers, forecasts and impact on global markets
The impact of tariffs and currency
As trade policies continue to change, the impact of US tariffs on the dollar is becoming increasingly apparent. Goldman Sachs highlights how these changes are currently eroding trust, both consumers and business in multiple ways.
“We’re looking forward to seeing you in the process of making money,” said Michael Cahill, senior currency strategist at Goldman Sachs.
“We have previously argued that the US exceptional return outlook is responsible for a strong valuation of the dollar. However, if it is involved in the profit margins of US companies and the real revenues of US consumers, they can erode that exceptionalism and, in turn, break the central pillar of the strong dollar.”
Goldman Sachs predicts the drop in US dollars is related to the changing nature of tariffs at this time. Dynamics have changed dramatically in recent weeks as widespread tariffs affect multiple countries.
Cahill writes:
“Currently, widespread unilateral tariffs are on the table, which means there is less incentive for foreign producers to provide accommodation, dollars that need to be weakened to accommodate US businesses and consumers as price-maintainers and to adjust when supply chains and consumers are relatively inelastic in the short term.”
Global currency shift
Global currency fluctuations are influenced by changes in US governance and perceptions of institutions. For almost a decade, the US dollar benefited from significant capital to US assets from developed market economies such as the Euro region, Japan and Norway. This positioning is expected to be reversed in the coming period.
This indication of reversal has already appeared. Consumer boycotts of US goods have been observed, with a decline in tourism flowing to the US, and following the recent tariff announcements, foreigners have arrived at major US airports.
International response to the weakness of the dollar
The USD’s weakness predictions have prompted a variety of responses from international financial institutions and governments. Foreign authorities have taken several steps over the past decade to help reduce the US currency’s foreign exchange reserves and reduce their reliance on the dollar.
Cahill Notes:
“To date, private sector investors have been compensated for a decline in demand for official sectors, which are likely to be tempted by the return of good assets. With wider policy disruptions and erosioned exceptionalism, private investors may still follow a similar pattern.”
Important Import Issues
The Goldman Sachs report highlights that important imports that are extremely difficult to substitute present additional challenges. With the increased foreign pricing power, US trade terms must be adjusted through higher import costs, depreciating dollars rather than foreign currency.
Cahill explains this situation as follows:
“It’s far from guaranteed, but it’s new possible with a 10% full tariff that affects all countries other than the US.”
US Dollar Drop Goldman Sachs predicts that stronger than expected foreign spending plans could become more and more materialized as they combine with a decline in US asset performance. This has already led to a short but aggressive turnover from US assets, and has led to increased interest in hedging US dollar exposure. We expect the weakness of USD to have a major impact on global global markets and investors next year.
