Goldman Sachs’ Chief Economist, Jan Hatzius, warned that foreign investor appetite for U.S. dollar assets may decrease unless the currency depreciates further, despite the absence of a significant economic slowdown. He cautioned that the dollar, currently highly valued, could see a downward trajectory due to weakening relative performance in U.S. economic fundamentals.
Challenges in U.S. Currency Valuation
Hatzius stated that the U.S. economy retains certain advantages, such as higher productivity compared to Europe. However, he highlighted that these benefits are diminishing, which will likely be reflected in the currency markets. The U.S. currently runs a massive current account deficit of over a trillion dollars, making the country heavily reliant on foreign investment to fund this gap.
“The dollar is still very highly valued, and I expect foreign investors to be less willing to keep adding to the U.S. share on their portfolios,” Hatzius commented. The increased reliance on foreign demand to fund the U.S. trade deficit could become unsustainable unless there is a depreciation in the dollar.
Impact of Tariffs and U.S. Economic Uncertainty
Since President Donald Trump’s inauguration, the U.S. dollar index has declined by approximately 9%, primarily due to market concerns over Trump’s protectionist tariffs. While some markets have speculated that the U.S. economy might contract, Hatzius believes the dollar could slide even without a recession. “The dollar depreciation would occur even with moderate rate cuts, not just a recession scenario,” he said.
Hatzius also discussed the possibility of the U.S. Federal Reserve cutting interest rates in the near future, citing the Fed’s constraints due to the inflationary impact of tariffs. “The Fed could be in a position to cut interest rates as soon as next week, if not for the inflationary effects caused by the tariffs,” he added.
Economic Growth Outlook
Goldman Sachs has revised its forecast for U.S. economic growth, predicting a slowdown to 0.5% by the fourth quarter of this year. The bank expects the U.S. to face a contraction in first-quarter growth, projecting only 0.3% growth, down sharply from 2.4% in the previous quarter.
Despite concerns about a potential economic slowdown, Goldman Sachs does not anticipate a full recession this year. However, the bank expects a total of three rate cuts, each of 25 basis points, in June, July, and September. Hatzius emphasized that much of the current economic activity is being driven by trade policy decisions, making it difficult to predict the next steps.
Uncertainty Surrounding Trade Policy
The latest developments in U.S.-China trade negotiations, including President Trump’s 90-day tariff pause for most countries (except China), have added to the economic uncertainty. “Figuring out the next step in trade policy can be very challenging,” Hatzius concluded, highlighting the complex dynamics currently affecting the U.S. economy.
