Recently, the Goldman Sachs foreign exchange strategy team indicated that the dollar is entering a new phase of strength due to Trump's planned high tariff policy and the continuous growth momentum of the U.S. economy. This forecast marks a shift from the firm's previously long-standing bearish stance on the dollar over the past two years.
For the past two years, Goldman Sachs had predicted that the dollar would gradually decline from an overvaluation, a view that was validated in 2023. However, since late September 2024, the dollar has begun a rebound, especially rising by 2.4% cumulatively after the November election. This trend prompted the firm to reassess its position, stating in its latest report that the dollar will remain strong for a longer duration.
The report points out that the tariff policy will become a key factor in next year's U.S. policy mix, along with expected further fiscal reforms. These policies may increase the cost of imported goods but will also reduce the operating costs of domestic companies, creating a strong combination supporting the dollar. According to the forecast, the trade-weighted dollar index is expected to rise by about 3% over the next year.
In terms of specific currency performance, Goldman Sachs expects the euro to drop to $1.03 against the dollar within the next 12 months, and the yen may fall to 159 yen against the dollar. This reflects the pressure that the strong dollar might exert on other major currencies.
Despite the optimistic outlook, the report also notes that the dollar's upward trend may encounter resistance. Reasons include the dollar's already high valuation and the potential for the Federal Reserve's accommodative policies. The strategy team anticipates it will be challenging for the dollar to surpass its 2022 highs in the short term.
Additionally, Goldman Sachs predicts that the strengthening dollar might compel other countries to take action to support their currencies, such as directly intervening in the foreign exchange market or raising interest rates. Such intervention strategies have been repeatedly employed over the past two years, as evidenced by Japan's efforts to support the yen.
Despite facing potential resistance, the dollar is still expected to maintain a robust performance driven by tariff policies and economic momentum.
