박재훈투영인
·
2 months ago
The Dollar Has Fallen 8% This Year — How Much Further Can It Drop? (Apr 27, 2025)
The Dollar’s 8% Drop: How Much Lower Could It Go?Investment banks are increasingly warning of structural risks to the U.S. dollar, citing everything from abrupt shifts in trade policy to potential large-scale withdrawals of foreign investment from U.S. assets.The consensus among major financial institutions now leans heavily toward continued dollar weakness.Deutsche Bank last week forecasted a "structural downtrend" in the dollar, while Barclays noted that the 8.3% decline in the Dollar Index this year "is likely to persist."Although many initially blamed President Trump’s aggressive tariff policies, others argue that his attacks on the Federal Reserve have undermined confidence in the dollar.UK fund manager Schroders, with over $1 trillion in assets, described recent actions as a "de facto rejection of the dollar-centric global currency system."By proposing tariffs based on trade deficits rather than direct trade barriers, Trump has made it clear the U.S. is shifting from a free trade stance to a balanced trade approach, according to Schroders commodities portfolio manager Jim Luke.Even Goldman Sachs, which was bullish on the dollar as of early April, reversed its view after the announcement of tariffs at levels not seen in over a century.Goldman's global head of FX, Kamakshya Trivedi, noted:"We reversed our bullish dollar view a few weeks ago because tariffs and other policy changes have significantly raised uncertainty, damaged domestic sentiment, and are likely to pressure corporate earnings and household real incomes in the U.S."How Much Further Could the Dollar Fall?The risks are magnified by the massive foreign holdings of U.S. assets — about $18 trillion in equities and $7 trillion in bonds, according to Deutsche Bank.Goldman Sachs noted early signs that investors are starting to reduce their exposure.Goldman’s analysis of Treasury and fund flows suggests that European investors have led most of the recent selling.Meanwhile, investors from China, Canada, the UK, and Japan have continued buying U.S. equities over the past two months.As the dollar declines, investors may seek to hedge their currency exposure, further exacerbating the weakness.Bank of America pointed out that foreign investors — especially Europeans, holding an estimated $6.5 trillion in U.S. equities — traditionally remain unhedged.The recent dollar weakness, they argue, now creates an "urgent need to hedge," which could trigger more dollar selling.BofA’s FX strategist Athanasios Vamvakidis had previously forecast the dollar falling to $1.15 per euro (currently around $1.14).However, he now expects the euro to rise to $1.19 by year-end — a further 3.5% dollar decline.BofA also projects that the pound could strengthen to $1.50 — a level unseen since before the Brexit vote in 2016.Over the medium term, Deutsche Bank’s FX strategists see the dollar eventually falling to $1.30 per euro within five years, signaling the end of the "strong dollar" era."All the conditions for a major dollar bear market are now in place," said George Saravelos, head of FX research at Deutsche Bank.Meanwhile, Goldman Sachs suggested that shorting the Australian dollar and going long the Japanese yen could provide an effective hedge against a weakening dollar.Historically, yen long positions tend to perform well during downturns, although they caution that during periods of Fed uncertainty and global tariff wars, the yen’s effectiveness may be diminished."Despite the sharp move in recent weeks, we believe there’s still more downside for the dollar," Goldman Sachs strategists wrote in an April 25 client note."European currencies are likely to be the main beneficiaries, while yen longs offer the best hedge if the upcoming U.S. jobs report shows clear signs of labor market weakening and raises the risk of deeper and faster Fed cuts."Goldman expects the yen to appreciate from the current 143 per dollar to 135 within 12 months, and to 115 by 2028.A More Optimistic View?Not all analysts are calling for relentless dollar weakness.London-based consultancy Capital Economics notes that the recent decline occurred despite favorable interest rate differentials for the dollar — an unusual dislocation, reflecting a "risk premium" associated with volatile policy and market disruptions, similar to the UK’s bond market turmoil in 2022.Markets Economist Shivaan Tandon of Capital Economics expects the dollar to "regain some lost ground in the coming months" as rate differentials start to matter again.He suggests that tariff-driven inflation could prevent the Fed from cutting rates quickly, thereby supporting the dollar relative to other currencies.While Capital Economics acknowledges that unorthodox policies could cause "longer-lasting damage to confidence," they argue that "the lack of credible alternatives" means the dollar is likely to remain at the core of the global financial system and the world’s primary reserve currency for the foreseeable future.[Compliance Note]All posts by Sellsmart are for informational purposes only. Final investment decisions should be made with careful judgment and at the investor’s own risk.The content of this post may be inaccurate, and any profits or losses resulting from trades are solely the responsibility of the investor.Core16 may hold positions in the stocks mentioned in this post and may buy or sell them at any time.
