Dollar Has Further To Fall, Says Goldman Sachs Chief Economist
Catherine RichardsThe dollar, battered and bruised by US tariff uncertainty and recession fears, has much further to fall.
The dollar, battered and bruised by US tariff uncertainty and recession fears, has much further to fall, Goldman Sachs chief economist Jan Hatzius says.
The dollar has fallen over 4.5% in April, set for its biggest monthly drop since late 2022, as investors dump US assets, sparking talk of a crisis of confidence in the world's No 1 reserve currency.
It has slumped 8% this year against a basket of other major currencies.
Further falls would exacerbate price pressures when tariffs are already pushing up inflation, Hatzius writes in an opinion piece in the Financial Times.
A weaker dollar, by making exports cheaper, would also help narrow the US trade deficit and help buffer the economy from recession. But Hatzius notes the drivers of dollar weakness matter and reduced appetite for US assets could offset the impact of a weaker currency on financial conditions.
"I often dodge questions about the dollar. A large body of academic literature and my own experience as an economic forecaster have taught me that predicting exchange rates is even harder than predicting growth, inflation and interest rates," said Hatzius.
"But with all due humility, I believe that the recent dollar depreciation of 5% on a broad trade-weighted basis has considerably further to go."
Hatzius, noted that two historical periods with similar dollar valuations to the present day — the mid-1980s and early 2000s — set the stage for a 25%-30% depreciation.
The IMF estimates non-US investors hold around US$22 trillion in US assets. Hatzius says this perhaps makes up a third of combined portfolios, with half of this in equities that are often not hedged for currency moves.
Hatzius adds a US current account deficit of US$1.1 trillion has to be financed by a net capital inflow of the same amount every year. In theory, this comes from foreign buying of US assets, so even a pause in foreign US asset purchases could hurt the greenback.
Hatzius says such factors would not carry so much weight if the US economy continued to outperform its peers, but this looks unlikely.
The IMF on Tuesday forecast US economic growth will drop by a full percentage point to just 1.8% in 2025 from 2.8% last year.
For Hatzius, dollar weakness should not be confused with a loss of its reserve currency status.
"Barring extreme shocks, we think the dollar’s advantages as a global medium of exchange and store of value are too entrenched for other currencies to overcome," he writes.
Deutsche Bank believes the euro could reach US$1.30 over the remainder of the decade, from US$1.13 right now, as the dollar loses favour.
