Goldman Sachs Research notes that as investors’ concerns about the U.S. fiscal situation have intensified, many have become increasingly pessimistic about the dollar’s prospects, predicting that the dollar will depreciate further. Ashok Varadhan, co-head of Goldman Sachs Global Banking & Markets, stated that the United States is not the only developed market with an unusually large budget deficit. Goldman Sachs Research estimates that the U.S. budget deficit will account for approximately 6% of GDP this year, compared with 5.5% in France and 3.6% in the United Kingdom.
Goldman Sachs published an article stating that the massive U.S. fiscal deficit has raised questions about debt sustainability, putting pressure on long-term U.S. Treasury bonds and the dollar exchange rate. Currently, the U.S. budget deficit is about $2 trillion, accounting for 6-7% of GDP, which is at a historical high, and investors are therefore demanding a “term premium.” Although rising yields on U.S. government bonds may attract private investors and the yield curve is expected to steepen, concerns about fiscal conditions remain strong.
The dollar has been depreciating this year. Since the beginning of 2025, the dollar has fallen by 10% against currencies of developed economies, with an 8% drop on a trade-weighted basis. Despite a brief rebound in early July, Goldman Sachs expects the depreciation trend to reassert itself. Andrew Tilton, Goldman Sachs’ chief Asia-Pacific economist, once said that according to Goldman Sachs’ exchange rate model, the dollar is still overvalued by about 15% relative to its long-term fair value. At the same time, there are signs that foreign investors may reduce their investment allocations to the United States to a small extent, which is also unfavorable to the dollar. In addition, U.S. policymakers also seem to want the dollar to depreciate.
From a historical perspective, the dollar’s depreciation cycles are often related to structural problems in the U.S. economy and changes in the global economic landscape. Currently, the U.S. economy is facing issues such as the twin deficit dilemma and the hollowing out of manufacturing. In 2024, the U.S. trade deficit reached $1.21 trillion, the fiscal deficit was $1.83 trillion, and the debt scale exceeded $36 trillion. The long-term reliance on debt expansion has weakened the dollar’s credit foundation and exacerbated market expectations of dollar depreciation. At the same time, the global de-dollarization trend is also putting pressure on the dollar to a certain extent. After the Russia-Ukraine conflict, many countries have accelerated their reduction of dependence on the dollar. For example, 80% of Sino-Russian energy trade is settled in local currencies, and Middle Eastern countries are also increasing their holdings of non-U.S. assets.
For investors, against the backdrop of the possible further depreciation of the dollar, Goldman Sachs recommends considering investing in assets such as gold as alternatives to fiat currencies, and using financial instruments to hedge exchange rate risks. In terms of stock investments, if the dollar remains weak, there is a rationale for diversifying investments and reducing allocations to the U.S. market, and emerging market assets are likely to benefit under the baseline scenario. However, considering that hedged U.S. stock returns during many periods of dollar weakness are comparable to those of global markets, it is more reasonable to hedge foreign exchange for U.S. stock allocations than to reduce holdings of U.S. stocks.
The expectation of further depreciation of the dollar will have a wide range of impacts on global financial markets, including the foreign exchange market, bond market, stock market, and commodity market. Investors and policymakers around the world need to closely monitor the dollar’s trend and changes in the economic factors behind it to cope with possible risks and opportunities.
