Dollar Further Decline Expected

LONDON (Reuters) – The dollar, battered and bruised by U.S. tariff uncertainty and recession fears, has much further to fall, says Goldman Sachs chief economist Jan Hatzius.

WHY IT’S IMPORTANT

The dollar has fallen over 4.5% in April, set for its biggest monthly drop since late 2022, as investors dump U.S. 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, with tariffs already pushing up inflation, Hatzius notes in an opinion piece in the Financial Times.

A weaker dollar would make exports cheaper, helping to narrow the U.S. trade deficit and buffering the economy from recession. However, Hatzius cautions that a reduced appetite for U.S. assets could offset the positive impacts of a weaker currency on financial conditions.

KEY QUOTES

“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.”

BY THE NUMBERS

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 that non-U.S. investors hold around $22 trillion in U.S. assets. Hatzius believes this constitutes about a third of combined portfolios, with half in equities often not hedged for currency moves.

He adds that a U.S. current account deficit of $1.1 trillion must be financed by a net capital inflow of the same amount every year. This theoretically depends on foreign buying of U.S. assets, meaning even a pause in foreign purchases could hurt the dollar.

CONTEXT

Hatzius states such factors would have lesser weight if the U.S. economy continued to outperform its peers, which appears unlikely. The IMF recently forecast that U.S. economic growth will drop to just 1.8% in 2025 from 2.8% last year.

WHAT’S NEXT

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 $1.30 over the remainder of the decade, up from $1.13 currently, as the dollar loses favor.