The trajectory of the US dollar and the broader currency landscape are being reshaped by evolving US trade policy, according to Goldman Sachs Research. As trade tensions rise and policy moves grow more uncertain, consumer and business confidence show signs of erosion. The team underscores that shifting perceptions of US governance and institutions are influencing how foreign investors view US assets, while the rapid back-and-forth in policy decisions complicates the task of pricing outcomes beyond a realm of high uncertainty. Against this backdrop, Goldman Sachs Research expects the US dollar’s weakness to persist against its main peers in the early months of 2025, with forecasts pointing to a meaningful depreciation over the next year: roughly 10% weaker versus the euro and about 9% weaker against the Japanese yen and the British pound, as of April 8. For nearly a decade, the dollar benefited from steady inflows into US assets from developed markets such as the euro area, Japan, and Norway. Yet, a convergence of factors—unattractive yields in competing assets and outperformance of dollar-denominated assets—has driven the dollar’s heavier share in global portfolios. That dynamic is now expected to reverse, presenting a new set of challenges and opportunities for investors.
Shifts in US Trade Policy and Confidence Across Markets
The immediate and visible impact of changes in US trade policy is a broad-based recalibration of how both households and businesses perceive the American economic model. The Goldman Sachs Research team emphasizes that the elevated level of trade tensions, combined with other uncertainty-raising measures, acts as a brake on domestic sentiment and on the willingness of global partners to commit to long-term economic plans with the United States. This is not only about the raw tariff numbers themselves; it is also about the signaling effect. The perception that policy decisions can swing rapidly, and that governance and institutional consistency may be in flux, creates a sense of risk that is difficult to internalize in asset prices. In practical terms, households facing uncertain income trajectories and businesses facing variable margins are more cautious about spending and investment. This caution tends to dampen demand and slows growth, reinforcing a softer macro backdrop that weighs on the dollar.
The research highlights that the changing perception of US institutions and governance affects the allure of US assets for foreign investors. If policymakers appear unpredictable or if policy tools are deployed in a way that is perceived as ad hoc rather than methodical, foreign capital may reallocate toward jurisdictions deemed more predictable or better aligned with long-run risk and return expectations. The consequence, from a currency perspective, is a reduction in the premium that has historically accompanied the dollar’s role as a preferred safe haven and as a core component of global portfolios. The rapidity and variability of policy decisions complicate the task of valuing a currency whose strength has historically reflected an underlying expectation of systemic stability and reliable rule of law. When investors cannot easily forecast policy trajectories, they price in higher risk premia and demand hedges, which can indirectly support depreciation pressures on the dollar.
In broader terms, these dynamics intersect with non-tariff issues that influence the US economic outlook. The analysis points to factors such as federal spending patterns, fiscal sustainability concerns, and labor market momentum—or potential weakness—as contributors to a more cautious stance among international investors. While tariffs represent a clear and tangible policy instrument, the broader mix of policy actions and fiscal weather can either amplify or dampen the effects of tariffs in currency markets. The takeaway is that the policy environment is now a central driver of market expectations, influencing how foreign participants allocate capital and how quickly they react to shifts in US trade policy.
Beyond the macro picture, there is evidence of concrete market responses that reflect changing attitudes toward US assets. The research notes instances of consumer boycotts of US goods and declines in foreign tourist arrivals at major US gateways—indirect channels that signal a softening of US demand from abroad. While the GDP implications are measured and hinge on several variables, Goldman Sachs Research attributes these effects, at least in part, to tariff announcements and a more aggressive stance toward traditional allies. In aggregate, such developments tend to dampen near-term growth expectations, which, in turn, influence exchange rate dynamics as market participants reassess the relative attractiveness of holding dollars versus other currencies.
There is also a salient narrative around global rotation away from US-centric exposure. When foreign spending plans appear stronger-than-expected and US asset performance lags, investors tend to rebalance toward foreign markets and seek hedges against US currency risk. This rotation can be gradual, but it tends to gain momentum as more data come in showing the US growth impulse weakening relative to other regions. The net effect is a shift in the composition of global portfolios—an evolution that supports a gradual decline in the dollar’s share of reserve and investment holdings and a corresponding shift in FX dynamics.
In this section, the central thread is that tariff policy is embedded within a broader uncertainty framework that shapes both sentiment and behavior globally. Tariffs operate not in isolation but as part of a broader policy mix that includes non-tariff measures, spending priorities, and labor market conditions. As a result, the path for the dollar cannot be read solely from tariff headlines; it requires an integrated view of how policy uncertainty translates into real-world economic and financial-market responses.
Non-Tariff Issues and the Policy Mix
Non-tariff issues—including the direction of federal spending, potential budget constraints, and the health of the labor market—are contributing to the evolving risk profile for the US economy. The interplay between tariff policy and these other policy levers creates a more complex forecast, where the dollar’s fate depends on how market participants interpret evolving signals, not merely on tariff levels. In particular, if concerns about the labor market intensify or if consumer real incomes come under pressure due to price dynamics, the dollar’s fundamental support could erode further. Conversely, if the policy environment stabilizes or if the US demonstrates resilience in other areas of the economy, some of the negative pressures on the currency could abate. The Goldman Sachs Research team highlights that the overall outcome hinges on a balance of these factors, with policy uncertainty and the perceived commitment to economic reforms playing a central role in shaping currency valuations in the near term.
The Dollar’s Trajectory: Forecasts for 12 Months Ahead
Goldman Sachs Research has outlined a clear forecast for the US dollar over the next 12 months, anchored by expectations of continued weakness against key currencies. The team projects that the greenback will slide by approximately 10% versus the euro, and by about 9% against the Japanese yen and the British pound, measured from the reference date of April 8. This path mirrors the evolving global demand for dollars as a reserve and as a core component of diversified portfolios, as well as the nuanced shifts in relative macro strength across major economies.
The analysts contend that for nearly ten years, the dollar benefited from inflows into US assets from developed market economies. These inflows were driven by a combination of relatively attractive US asset valuations, robust liquidity, and the perceived safety of dollar-denominated assets. As a result, the dollar’s share of global portfolios grew substantially, reinforcing its dominance on the world stage. However, with a broadening policy uncertainty and the potential re-pricing of risk across asset classes, that positioning is expected to loosen. The anticipated reversal is not simply a function of domestic US dynamics, but a reflection of evolving relationships with other major economies whose own growth profiles and policy settings may become relatively more favorable.
A central theme in the forecast is the notion of exceptional return prospects underpinning the dollar’s valuation. The team emphasizes that the dollar’s strength has historically been tied to these exceptional returns, which attract capital and sustain demand for dollar assets. Yet, the introduction of tariffs that compress US firms’ profit margins and dampen real incomes may undermine this core pillar. As Cahill notes, tariffs have the potential to erode the competitive advantage embedded in the dollar’s exceptionalism, thereby weakening the central rationale for holding a dominant dollar position. The price that the economy and currency pay in such a scenario is a re-pricing of risk and a reallocation of portfolios toward assets and currencies that offer a more compelling risk-adjusted return profile under a changed policy regime.
In forecasting USD trajectories, Goldman Sachs Research also highlights the differential impact of tariff-driven uncertainty on the United States versus its trading partners. Historically, the team argued that foreign economies would bear a larger share of tariff-induced uncertainty than the United States. However, the data in the current cycle show a more mixed picture. While US soft data have displayed worryingly weak signals, several European indicators have demonstrated surprising resilience. This asymmetric response is partly explained by non-tariff factors like the fiscal policy stance and labor market dynamics in the United States, which contribute to the expectation that the US might not outperform globally across all time horizons under current policy settings.
The forecast thus rests on a framework in which policy signals interact with global demand patterns, exchange-rate pass-through effects, and reallocation of capital across regions. The idea is that if tariffs and other policies compress US profitability and consume real income, investors may seek higher-yield opportunities abroad or in hedges that reduce currency exposure. In that sense, the dollar’s depreciation in the base scenario reflects a rebalancing toward a more globally diversified risk environment, rather than a simple mechanical result of tariff levels.
The call for a weaker dollar is not a call for complacency about US fundamentals. Rather, it reflects a nuanced assessment of how the policy landscape interacts with market pricing and the relative attractiveness of other currencies and assets. The research team underlines that even if the dollar weakens against a broad set of currencies, the magnitude and timing of such moves will depend on the evolution of trade policies, the persistence of uncertainty, and the resilience of the US economy in the face of any shocks arising from policy shifts. In short, the forecast is conditional on a particular sequence of policy outcomes, and investors should be prepared for a range of contingencies as policy clarity evolves.
Price-Discovery and Market Dynamics
The mechanism through which policy uncertainty translates into currency depreciation is complex and multi-layered. It involves price-discovery processes in foreign exchange markets, adjustments in risk appetites, and the reallocation of portfolios toward hedged or alternative exposures. The analysts point out that as markets price in higher risk premia tied to policy uncertainty, the demand for US dollars to fund hedges can shift in unpredictable ways. This means that the dollar’s path may be choppier and more data-dependent than a simple macro rule would imply. The role of market depth and liquidity also becomes crucial in determining the speed and extent of the dollar’s adjustment in response to new information about tariffs, non-tariff policy actions, or policy changes that alter growth expectations.
In addition to macro fundamentals, the currency dynamic is influenced by the behavior of policy makers in other major economies. If, for example, European authorities or policymakers in Asia respond to US tariff policy with measures of their own—such as adjusted tariffs, subsidies, or changes in trade rules—these responses could crosstalk into currency markets. The cascading impact of policy moves can complicate the depreciation path of the dollar by offsetting some of the expected effects through relative strength gains in other currencies or through shifts in investor risk tolerance.
Overall, the forecast paints a picture of a dollar that remains under pressure in the near term, but one that could stabilize or exhibit episodic strength if policy volatility moderates, if US macro data show resilience, or if foreign economies exhibit greater vulnerability to domestic policy shocks in other regions. The central message is that the currency is highly sensitive to the policy mix and to the relative performance of US versus global growth and inflation dynamics. Investors should remain vigilant to policy developments and to the broader tail risks associated with trade tensions, which could either amplify or dampen the anticipated depreciation path.
The Flow Story: From Global Demand to Reversal
For many years, the dollar benefited from a steady stream of global demand for US assets, particularly from investors in developed economies such as the euro area, Japan, and Norway. The dollar’s prominence in global portfolios was reinforced by a combination of attractive relative yields, perceived safety, deep and liquid markets, and the expectation that the United States would continue to offer superior total return prospects. This accumulation of external demand supported a robust dollar, helping to sustain a positive feedback loop: the dollar’s strength attracted more capital, which in turn reinforced the currency’s role as the leading reserve and transaction currency.
Goldman Sachs Research notes that those dynamics are now facing a headwind. The team points to a confluence of factors that could reverse the trend: unattractive yields in competing assets relative to US assets, a potential underperformance of US assets on certain horizons, and structural shifts in the behavior of private and official sector investors. The shift may also reflect a broader reallocation in which foreign investors reassess the risk-return profile of dollar-denominated exposures in light of a policy environment characterized by higher uncertainly and potentially more frequent swings in tariff policy and non-tariff measures. In this context, the US currency’s share of global reserves and portfolios could decline toward levels not seen since the early days of the euro era, a development that carries significant implications for global financial markets.
The analysis emphasizes that private sector investors have, to date, largely absorbed reductions in official sector demand for dollar liquidity. This absorption is attributed to the expectation of superior asset returns in dollar-denominated instruments, even when policy uncertainty is relatively elevated. But the broader disruptions to the policy regime—if sustained—could alter this favorability calculus. The prospect of a more generalized policy disruption, with a higher likelihood of cross-border frictions or supply-chain constraints, could prompt private investors to reorient toward more diversified or non-dollar exposures. In such a scenario, the dollar could see a more prolonged adjustment as private capital responses adjust to the evolving risk environment.
The broader implication for the global financial system is that a shift away from the dollar’s dominant role could alter the structure of global capital markets. The development of alternative funding currencies, changes in central bank reserve composition, and a more varied set of funding options would accompany such a transition. Policymakers and market participants alike would need to adapt to an environment in which the dollar’s relative weight diminishes, and new benchmarks for pricing and hedging emerge. The direction and speed of such changes depend on a range of factors, including the trajectory of US trade policy, the resilience of the US economy, and the responses of major economies to the evolving policy landscape.
Tariffs, Pass-Through, and the Mechanics of Terms of Trade
A central pillar of Goldman Sachs Research’s analysis is how tariffs propagate through an economy and how those pass-through mechanisms influence exchange rates and the terms of trade. Tariffs can affect margins at foreign firms, alter domestic margins for US businesses, or directly raise prices paid by consumers. The relative importance of these channels varies depending on market structure, the substitutability of inputs, and the leverage that domestic or foreign producers possess in pricing negotiations. The literature on tariff pass-through typically identifies a mix of these three channels as the principal pathways by which tariff policy is transmitted into the real economy. The Goldman Sachs team emphasizes that the actual pass-through will hinge on the negotiating power of domestic firms and the competitiveness of foreign suppliers.
In the context of tariffs on “critical imports”—those goods that are difficult to substitute—foreign pricing power tends to rise. In such cases, higher import costs may be passed through more readily into domestic prices, potentially weakening the US terms of trade. If the United States is faced with higher import prices due to tariff measures, the dollar would typically depreciate as part of the adjustment process, while the foreign currency would benefit from the resulting improvement in relative terms of trade for the involved partners. This dynamic is an important counterpoint to arguments that tariffs must necessarily strengthen the dollar by constraining supply or raising import costs for others; in certain configurations, the opposite occurs.
Cahill’s analysis stresses that the unilateral and broad-based nature of a tariff regime influences the price-setting dynamics for both foreign producers and US consumers. When tariffs are applied across the board, there is less incentive for foreign producers to concede terms or to absorb costs. In such a setting, US businesses and consumers effectively become price-takers, bearing a larger share of the tariff burden if supply chains and consumer demand exhibit inelasticity in the short run. The implication for the currency is that the dollar could weaken as the market prices in higher costs and a slower growth impulse. This concept is captured in a straightforward intuition: if the policy regime reduces the price-setting power of the United States relative to its trading partners or makes supply chains more inelastic, the currency must adjust to restore equilibrium in trade flows.
The analysis also considers the intensity and breadth of tariff actions. Cahill notes that a 10% across-the-board tariff would not be a trivial development; rather, it introduces a broad-based shock that makes the cost-distribution more uniform across economies outside the United States. Under such a scenario, the dollar might bear a larger share of the adjustment because international pricing would shift in a way that reduces the perceived competitiveness of US consumers and producers. In effect, the terms of trade could deteriorate for the United States, and the currency would bear depreciation pressure as part of the mechanism to reestablish balance with global trade partners.
A key point in this section is the forward-looking nuance about how policy changes translate to real-world outcomes. The authors acknowledge that while the framework points to depreciation pressures under a broad tariff regime, the actual outcome is contingent on how foreign producers respond, how supply chains adapt, and how quickly domestic consumers adjust to price changes. The dynamic pricing of tariffs is not a mechanical one-way effect; rather, it is a result of multiple interactions across markets, sectors, and geographies. Accordingly, the currency path remains inherently uncertain and sensitive to the evolution of policy, market responses, and the broader macroeconomic environment.
The Pass-Through Channels in Practice
In practical terms, pass-through effects manifest in several distinct channels. The first is margin compression on foreign producers that export to the United States, which can lead to price adjustments in export prices or reductions in volumes as demand stiffens. The second channel occurs when domestic margins are squeezed for US firms relying on imported inputs or components that become costlier due to tariffs. In both cases, consumer prices can rise, potentially reducing disposable income and dampening domestic demand. The third channel is the external price dynamics that emerge when tariffs influence global supply chains, prompting shifts in production locations or suppliers and affecting international competition.
If domestic firms lack bargaining power or if global supply chains are relatively inelastic in the short term, pass-through to consumer prices may be more pronounced, reinforcing inflationary pressures that complicate monetary policy. Conversely, if domestic and foreign producers have greater negotiating leverage, the pass-through may be more gradual, allowing some cushion for the economy and the currency. The key takeaway is that pass-through is not monolithic; it depends on industry structure, substitution possibilities, and the strategic responses of firms to new price signals.
From a currency viewpoint, the sum of pass-through effects is a determinant of the terms of trade and, ultimately, exchange rate dynamics. If the pass-through leads to higher US import costs and weaker consumer purchasing power, the reduced demand for US dollars could contribute to depreciation. If, instead, pass-through results in offsetting adjustments in other macro channels—such as monetary policy expectations or asset yield differentials—the dollar’s path could diverge from the base scenario. The bottom line is that tariff mechanics and their pricing consequences are central to the currency forecast and to the broader assessment of the US economic outlook in a world where trade policy is less predictable.
Global Reactions: Reserve Currency Dynamics and Official Actions
The ongoing shift in how other countries interact with the dollar is central to the outlook for US currency strength. Foreign officials have undertaken a range of measures intended to reduce reliance on the dollar for global transactions and reserve holdings. This phenomenon, observed over the past decade, contributes to a secular trend away from the dollar’s dominant status. The Goldman Sachs Research team notes that the dollar’s share of foreign exchange reserves has gradually declined and now sits near its lowest level since the euro’s advent. Private sector investors have, up to this point, largely compensated for what official sector demand may have reduced, attracted by the superior asset returns available in dollar-denominated instruments. Still, the evolving policy disruption and the erosion of exceptionalism could lead private investors to reassess and potentially follow the same pattern as official sector behavior, further diminishing the dollar’s resilience in the global currency complex.
This section also addresses the tactical changes in central bank behavior and the strategic posture of foreign governments toward dollar reserve diversification. As the US contemplates new tariff structures and broader policy shifts, foreign central banks may reallocate reserve holdings away from dollars toward a basket of currencies or toward assets perceived as offering better diversification and risk-adjusted returns under new policy regimes. The result could be a gradual but persistent decline in the dollar’s reserve-currency status, reinforcing the need for a robust and diversified approach to foreign exchange risk for institutions that manage large cross-border liquidity and capital flows.
The market narrative has already begun to reflect an anticipated rotation away from US assets in response to the combination of stronger foreign spending plans and weaker performance from US assets. In practice, this rotation manifests in market behavior such as increased demand for hedging instruments and a broader set of currency exposures among global investors. The shift is not merely a reaction to tariff levels; it is also a response to the broader policy uncertainty and the resulting re-rating of the relative risk and return of different currency and asset classes. The net effect on the dollar’s role in global markets is a gradual erosion of its dominance as investors diversify their exposure in a world where policy dynamics are uncertain and where non-US growth stories have become more compelling in relative terms.
An important implication of the global-response narrative is that the dollar’s fate is increasingly entangled with the evolving composition of central bank foreign exchange reserves. As reserve managers diversify away from dollar-heavy allocations, the balance of power in the currency world shifts. This has potential consequences for financial stability, liquidity provision in FX markets, and the pricing of cross-border capital flows. The analysis suggests that if the broader policy disruptions intensify, or if the US further amplifies unilateral tariff actions, private sector investors may be more inclined to adopt hedged or non-dollar exposures, reinforcing the trend away from dollar-centric finance over time.
Official Actions and Market Perceptions
Across borders, governments and official entities are weighing strategies to reduce vulnerability to US policy shifts. The reasons include the desire to mitigate the impact of sudden tariff changes on domestic industries, to preserve competitiveness in a more challenging external environment, and to secure greater autonomy in monetary and fiscal policy responses. These actions, collectively, contribute to a landscape where the dollar’s influence is less assured and where currency markets price in a wider array of risk scenarios. With the dollar’s share of official reserves potentially under pressure, market participants reassess hedging strategies and look for instruments that better align with an environment of policy volatility and shifting global growth dynamics.
In this context, private sector investors may find opportunities in regimes where policy clarity improves, inflation dynamics align with expectations, and real incomes stabilize. Conversely, if policy uncertainty worsens or if tariff regimes expand in ways that are adverse to the US, capital could flow toward currencies and assets that exhibit greater resilience to policy shocks and that offer more predictable macroeconomic trajectories. The overarching message from this section is that the global reserve-currency framework is subject to reassessment in response to the evolving trade policy landscape, and that the dollar’s once-dominant position is increasingly subject to contestation by a broader set of market participants.
Market Psychology: Uncertainty and Pricing Under Trade Tensions
Investor psychology plays a critical role in how the currency market integrates information about trade policy and policy uncertainty. The Goldman Sachs Research team emphasizes that equity-like or credit-like assets are priced with different sensitivities to policy ambiguity, and that currencies respond to shifts in risk appetite and macro expectations in nuanced ways. In times of heightened trade tensions, investors often seek hedges and diversify away from a single dominant currency, leading to more pronounced volatility in FX markets. The research highlights that the uncertainty surrounding tariffs, coupled with concerns about non-tariff policy dynamics, translates into a more cautious risk posture among global investors.
From a theoretical standpoint, the adjustment process in exchange rates under heightened policy uncertainty involves a re-pricing of risk premia, adjustments in interest rate expectations, and reallocation across asset classes that offer different risk-return profiles. In practice, this means that even when macro data might not strongly deteriorate in the near term, the mere perception of policy unpredictability can induce capital flows into alternative currencies or hedging instruments, which in turn exerts depreciation pressure on the US dollar.
The narrative also considers the potential for non-linear responses to policy shocks. Small policy moves, if perceived as harbingers of more radical shifts, can trigger outsized reactions in currency markets as investors recalibrate portfolios to reflect a broader uncertainty regime. Conversely, signs of policy normalization or stabilization can prompt a partial reversal in risk sentiment, supporting a temporary rebound in the dollar’s value before new uncertainties reassert themselves.
In practical terms, this section underscores the importance of monitoring policy communications, tariff developments, and the evolving stance of both US and foreign policymakers. For asset managers and traders, it signals the need for a disciplined approach to currency risk, including hedging strategies and diversified exposure that is resilient to a range of policy outcomes. It also highlights the value of scenario analysis to capture potential asymmetries in the risk-reward framework under different tariff or policy trajectories.
Hedging, Diversification, and Portfolio Considerations
From an investment perspective, the evolving policy landscape elevates the importance of hedging currency risk and diversifying across geographies and asset classes. The research implies that as the US policy environment grows more uncertain, investors may gravitate toward portfolios with a broader currency mix, higher-quality assets outside the United States, and instruments designed to mitigate downside currency risk. At the same time, the potential for a sharper-than-expected dollar depreciation underscores the need for careful risk management, as extreme moves could have outsized implications for portfolio performance. The balance between seeking yield in dollar-denominated assets and reducing currency exposure becomes a central theme for global asset owners.
Investors should also consider the liquidity and operational considerations of hedging, including costs, instrument availability, and the potential for basis risk in cross-currency exposures. As market conditions evolve, the relative attractiveness of different hedging approaches may change, requiring ongoing reassessment of strategies and recentering of risk budgets. The overarching insight is that currency risk management is a dynamic process in a world where tariff policy, geopolitical developments, and macro-to-micro linkages interact in complex ways to shape market outcomes.
Scenario Analyses: Across-the-Board Tariffs and Beyond
The Goldman Sachs Research team emphasizes that the tariff landscape could evolve in multiple directions, each carrying distinct implications for the US dollar and for global markets. A particularly important scenario involves broad, unilateral tariffs across many products and trading partners. In this context, the discussion centers on the potential for higher import costs to feed into domestic prices, raising the risk of an inflationary impulse within the United States if the pass-through is pronounced. The currency implication under this scenario would likely be a depreciating dollar as the terms of trade deteriorate and the real economy adjusts to higher consumer prices and potentially lower real incomes. The risk, of course, is that the policy response—such as monetary policy tightening in response to inflationary pressures—could interact with fiscal measures to complicate the macro path further and magnify currency volatility.
Another scenario relevant to the analysis is one in which tariff-related uncertainty gradually stabilizes or declines. If policy clarity improves and the United States demonstrates a credible commitment to economic reform and a coherent tariff strategy, the market may price in reduced risk premia, leading to more stable or even stronger dollar dynamics at least in the short run. Conversely, if foreign markets interpret US policy as less predictable, risk premia could persist at elevated levels for longer, prolonging depreciation pressures on the dollar and driving continued rotations into non-dollar exposures.
The analysis also considers the potential for a qualitative shift in global supply chains. In a world where tariffs alter the calculus of production location and supplier networks, firms may diversify their sourcing in ways that reduce domestic exposure to tariff costs but increase global interdependence. This could, over time, attenuate the currency effects that tariffs have on the dollar, while simultaneously creating new sources of systematic risk in the FX market as flows shift toward regions offering more favorable cost structures and policy stability. In this sense, the tariff regime becomes a catalyst for structural changes in the global economy that have lasting implications for currency valuations and capital flows.
Policy responses and market structure will influence which scenario unfolds. If policymakers respond with targeted measures, enhanced transparency, and credible long-run plans to address structural issues, the market could see a moderation in uncertainty and a gradual stabilizing effect on the dollar. If policy remains fragmented or escalates in breadth and intensity, risk premia could stay elevated, sustaining depreciation pressures and encouraging a broader diversification of portfolios away from dollar exposure. The scenario framework underscores the importance of flexible risk management and the need to monitor policy signals closely as they unfold.
Implications for Investors and Policy Managers
The implications of Goldman Sachs Research’s findings are broad for both investors and policymakers. For investors, the core message is that the US dollar’s strength may be challenged by a combination of tariff-driven uncertainty and shifts in the global flow dynamics that have historically supported a dollar-centric global financial architecture. The anticipated depreciation against major peers highlights the importance of evaluating the risk-reward trade-offs associated with dollar exposure, and of considering hedged strategies, currency diversification, and the selective use of dollar-denominated assets within a diversified portfolio. The analysis suggests that a measured approach to currency risk, informed by a structured scenario framework and a disciplined response plan, can help navigate a landscape characterized by policy volatility and evolving global demand patterns.
For policymakers, the findings emphasize the critical role of clarity, predictability, and coherence in trade policy and broader governance. The market’s reaction to tariff actions and the broader policy mix indicates that the credibility of policy signaling matters as much as the policy content itself. A commitment to transparent objectives, clear timelines, and consistent communication can help reduce the degree of uncertainty priced into currency markets. Conversely, persistent unpredictability or rapid reversals in policy direction risk reinforcing the depreciation pressures on the dollar, while potentially triggering volatility that disrupts global financial conditions and financing conditions for the real economy.
The interaction between tariffs and the exchange rate also has implications for inflation dynamics, consumer welfare, and the competitiveness of US industries. If tariffs consistently raise import costs and reduce real incomes for households, monetary policy may face a more challenging balancing act between supporting growth and containing inflation. This, in turn, feeds back into currency valuations, creating a cycle in which policy responses influence market expectations and vice versa. Understanding these dynamics is essential for stakeholders who manage cross-border operations, international supply chains, and global investment exposures.
In sum, the policy environment surrounding US trade and governance is rapidly evolving and has far-reaching implications for currency markets, asset allocation, and macroeconomic stability. The Goldman Sachs Research framework provides a lens through which to view these developments, offering a structured approach to assess risk, price outcomes, and navigate a complex, interconnected global economy. The overarching guidance is to remain adaptable, incorporate robust scenario analysis, and maintain a disciplined approach to currency risk management in a world where tariff policy, non-tariff issues, and policy uncertainty are the new constants shaping financial markets.
The Road Forward: Implications for Investors and Policy
As the landscape evolves, investors must calibrate portfolios to reflect the interplay of tariff policy, financing conditions, and currency dynamics. The depreciation path for the dollar implies that investors with non-dollar exposures may benefit from greater hedging flexibility and from reevaluating the proportion of dollar risk in their overall risk budget. The potential for a broader range of outcomes also argues for diversified currency exposure and for an emphasis on assets and strategies that can adapt to changing macro regimes without compromising risk controls. For international investors, the evolving US policy stance could alter the risk-reward calculus of US equities and fixed income, potentially prompting adjustments in cross-border allocations and in credit risk assessments.
From a policy perspective, the key takeaway is the continued importance of policy credibility and predictability. The market’s reaction to policy shifts shows that communications and the sequencing of policy steps matter as much as the policy content itself. A coherent policy framework that addresses structural economic issues while providing a clear path for tariff implementation and evidence-based adjustments can help stabilize expectations and reduce the risk of abrupt currency moves. In contrast, a policy approach characterized by frequent reversals, ad hoc measures, and inconsistent messaging is likely to amplify volatility and to weigh on the dollar’s long-run reputation.
The article also underscores the enduring question of how to balance the goals of trade protection with broader economic stability. While tariffs can shield specific domestic industries, the broader impact on GDP growth, investment, and consumer welfare must be weighed carefully. The currency implications of these policy choices add another layer to the decision matrix facing policymakers, as exchange-rate dynamics influence import costs, inflation, and the cost of external financing. The path forward, therefore, requires a holistic assessment that integrates trade policy, macroeconomic fundamentals, and financial-market dynamics to guide both investment strategies and policy actions.
Conclusion
In sum, Goldman Sachs Research argues that shifts in US trade policy are delivering a meaningful impact on the currency and the attractiveness of US assets in the eyes of global investors. The combination of rising trade tensions, policy uncertainty, and evolving governance perceptions is eroding confidence and complicating the pricing of outcomes beyond high uncertainty. The US dollar’s path is characterized by anticipated weakness against key peers in the next 12 months, driven by a complex mix of factors including tariff dynamics, terms of trade considerations, and shifts in global capital flows. The long-run effect on global markets will hinge on how policy trajectories unfold, how the private sector and official sector respond to these shifts, and how the rest of the world recalibrates its exposure to the dollar in an environment of evolving reserve currency dynamics.
This article reflects an analytical perspective intended to illuminate the channels through which policy decisions can influence currency markets. It emphasizes that the forecast comes with caveats and that the path of the dollar is contingent on a broad array of future developments, including tariff policy design, non-tariff policy actions, fiscal dynamics, and the resilience of the US economy relative to its global peers. Investors and policy makers alike should stay attuned to the evolving policy landscape, prepare for multiple scenarios, and approach currency risk with a disciplined, flexible framework that can adapt to changing conditions in US trade policy and the broader international environment.