Goldman Sachs' chief economist Jan Hatzius argues that despite the dollar’s recent 5% decline, it remains significantly overvalued and poised for further depreciation. Structural portfolio imbalances and elevated valuation levels point to a multi-year adjustment.
Key Points:
Overvaluation Still Extreme:
The dollar remains nearly two standard deviations above its long-term real average since 1973.
Comparable historical peaks in the mid-1980s and early 2000s were followed by 25–30% depreciation cycles.
Foreign Holdings Pose Structural Risk:
Non-US investors hold $22 trillion in US assets, around one-third of their total portfolios.
About half of these holdings are unhedged equity exposures, meaning a shift in sentiment could amplify FX moves.
Investor Rebalancing Could Trigger Declines:
Even a modest reduction in US portfolio exposure by international investors could drive material dollar depreciation.
Goldman sees this as a potential long-term headwind to the USD, rather than a temporary adjustment.
Conclusion:
Goldman Sachs believes the dollar has considerably further to fall, with historical precedent, current valuation metrics, and global capital flow dynamics all pointing toward a multi-quarter USD downtrend. Portfolio diversification and declining US asset appeal may fuel the adjustment.
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