Goldman Sachs Warns Multi-Year US Dollar Depreciation Incoming

Banking titan Goldman Sachs believes the US dollar’s poor performance over the last few months is just the beginning of a downtrend that will likely last for years.

In a new podcast, Goldman Sachs chief economist and head of global investment research Jan Hatzius calls the US dollar the “dog that didn’t bark.”

Hatzius says the US economy has stabilized since April, when the stock market plunged amid Trump’s trade war. However, he points out that the dollar has continued to weaken, depreciating even as the economy rebounds.

The economist says the dollar’s bearish price action suggests it’s being driven by long-term structural factors rather than the near-term economic outlook.

“The dollar is still very highly valued on a broad trade-weighted basis, and that historically sets up for depreciation in the coming years. 

The US still runs a very large current account deficit that needs to be financed by equal-sized capital inflows.

Then there are some of these more tail risk concerns around things like Fed independence that probably also have an impact on how foreign investors perceive investments in the US…

This is not about a fire sale. It’s about making it a little bit more difficult to obtain the capital inflows that are needed to cover the current account deficit.”

In April of this year, Hatzius said that the US had a current account deficit of $1.1 trillion, which needed to be financed by foreign investments in US assets such as Treasuries and equities.

The current account deficit exists because the US spends more than it earns from the global economy. By consuming more than it produces, the country relies on foreign investment to bridge the gap. But when foreign funding slows, pressure builds on the dollar as capital flows outward, increasing the global supply of USD and contributing to its devaluation.

At time of writing, the US dollar index (DXY), which tracks the performance of the dollar against a basket of major currencies, is down about 10% year-to-date.

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