Goldman Sachs predicts the dollar will fall. How will this affect Forex?

24, Apr - NEWS

In this article, we will rely on the opinion of Goldman Sachs Chief Economist Jan Hatzius on the future of the US dollar (USD) amid the current uncertainty in the economy. Let's break down the key points of the article and analyze their impact on the Forex market.

Key Idea: Dollar Weakening Forecast

Hatsius expects the US dollar to continue to decline after falling more than 4.5% in April and 8% since the beginning of the year. This is due to a number of factors, such as uncertainty over tariffs, recession fears, and rising price pressures. Such a weakening could have serious implications for the global currency market.

Why does it matter?

• The dollar as a global currency: The USD is the world's main reserve currency, and its movements have a significant impact on other currencies, commodities, and international trade.
• Inflationary pressures: A weaker dollar could increase inflation within the US as imports become more expensive. However, it could also reduce the trade deficit by increasing the export of US goods.

Historical analogies: Potential drop of 25-30%

Hazius cites two historical periods - the mid-1980s and early 2000s - when the dollar depreciated by 25-30%. These examples show that the current dollar weakness may be just the beginning of a longer trend.

Possible Forex Implications:

• Euro and Other Majors Rising: If the dollar continues to weaken, EUR/USD, GBP/USD and other pairs could see significant gains.
• Emerging Market Currencies Strengthening: A weak dollar is good for emerging market currencies (e.g. TRY, INR, BRL) as it makes their exports more competitive.
• Gold Investments: Gold tends to appreciate when the dollar weakens as it is seen as an alternative safe haven investment.

US Current Account and Capital Inflows

The article highlights the huge US current account deficit of $1.1 trillion. This deficit is offset by foreign purchases of US assets. However, if there is a pause in such purchases, this could further negatively affect the dollar.

How will this affect the market?

Decreased demand for the dollar: If foreign investors begin to invest less in US assets (such as stocks or bonds), the dollar will lose support.

Increased volatility: Uncertainty around capital inflows could cause sharp fluctuations in the dollar, which will create new opportunities for traders.

The impact of a weak dollar on inflation and the US economy

Hatsius notes that a weaker dollar could reduce the US trade deficit and protect the economy from recession. However, he warns that the factors causing the weakness could offset the positive impact.

Key effects:

• Inflation: A weak dollar makes imports more expensive, which increases inflationary pressures at home.
• Exports: American goods become cheaper for foreigners, which boosts exports and helps balance the trade deficit.
• Interest rates: If inflation rises, the Federal Reserve may raise interest rates, which would temporarily strengthen the dollar but slow economic growth.

The Vulnerability of Foreign Investor Portfolios

The article points out that foreign investors hold about $22 trillion in US assets, much of which is not hedged against currency fluctuations. This means that a weaker dollar could significantly affect the value of these assets for overseas holders.

Potential changes:

• Capital outflows: If the dollar continues to weaken, foreign investors could start to withdraw funds from the US, which would add to the pressure on the dollar.
• Shift to other assets: Investors could switch to European assets, Japanese bonds, or even digital currencies such as Bitcoin.

Possible scenarios for the forex market

Based on the analysis of the article, several likely scenarios can be identified:

Scenario 1: The dollar continues to fall

EUR/USD trend: The euro could reach 1.20-1.30 against the dollar, especially if the ECB continues to raise interest rates.

USD/JPY trend: The yen could strengthen as Japan remains a major creditor of the US.

Commodity Currencies: The Australian Dollar (AUD) and Canadian Dollar (CAD) could rise due to their links to commodity markets.

Scenario 2: The Fed Raises Rates

If the Fed decides to strengthen the dollar by raising interest rates, this could temporarily stabilize the situation.

However, rising rates could slow US economic growth, which would put pressure on the dollar again in the long term.

Scenario 3: Geopolitical Tensions

Any geopolitical events (such as trade wars or conflicts) could accelerate the weakening of the dollar, as they create additional uncertainty.

The Role of Trust in the Dollar

The article addresses the issue of a "crisis of confidence" in the dollar as the world's leading currency. While a complete abandonment of the dollar is unlikely, its weakening could lead to the following changes:

• Rising popularity of the euro: The euro may strengthen its position as an alternative reserve currency.
• Interest in cryptocurrencies: Bitcoin and other digital assets may gain additional attention as an alternative to fiat currencies.

What should traders do?

For traders, the current situation offers many opportunities. Here are some recommendations:

For short USD:

• Go short against major currencies (EUR, GBP, CHF).
• Look at emerging market currencies that could rally on a weak dollar.

For long EUR and other currencies:

• If the ECB continues to raise rates, EUR/USD could show significant gains.
• Consider buying commodity currencies (AUD, CAD, NZD) if commodity markets improve.

For inflation protection:

• Consider investing in gold (XAU/USD) or other precious metals.
• Explore cryptocurrencies as an alternative store of value value.

Conclusion

The weakening of the US dollar predicted by Hatzius could be one of the key events in the forex market in the coming months. Its causes are a combination of economic uncertainty, the current account deficit and a possible decline in capital inflows into the US. For traders, this creates both risks and opportunities.

Key Takeaways:

• The dollar may continue to fall: Target levels for the decline are 25-30%, similar to previous periods.
• The euro and yen will strengthen: EUR/USD and USD/JPY will become popular pairs for trading.
• Gold and cryptocurrencies will benefit: As safe havens, they will receive additional interest if the dollar weakens.
• Uncertainty will remain: The market will depend on the decisions of the Fed, ECB and other key players.
• It is important for traders to monitor macroeconomic indicators, central bank decisions and the geopolitical situation to make informed decisions. Be prepared for increased volatility and use protective mechanisms such as stop loss and take profit.