Unlock the publisher's digest free
Roula Khalaf, editor -in -chief of the FT, selects her favorite stories in this weekly newsletter.
The writer is chief economist of Goldman Sachs
I admit it: I often dodge questions about the dollar. A large number of university literature and my own experience as an economic forecastist taught me that forecasting exchange rates is even more difficult than predicting growth, inflation and interest rates.
But with all the humility due, I think that the recent depreciation of a dollar of 5% on a large weighted basis depending on trade has much more to go.
Data from the Federal Reserve show that the actual value of the dollar is still nearly two standard deviations above its average since the start of the floating exchange rate era in 1973. The only two historical periods with similar evaluation levels were the mid-1980s and the early 2000s. The two prepared the field for depreciations of 25 to 30%.
Combined with the ongoing portfolio of American assets and the outperformance of the country's shares, the dollar assessment has greatly strengthened the share of the United States in global investor portfolios. The IMF estimates that non -American investors now hold $ 22 billion in American active assets. This perhaps represents a third of their combined wallets – and half this is in actions, which are often not covered. A decision by non-American investors to reduce their exposure to the United States would therefore certainly certainly lead to a significant depreciation in dollars.
In fact, even the reluctance of non -American investors to add to their American wallets will likely weigh the dollar. Indeed, the accounting of the balance of payments implies that the American current account deficit of 1.1 TN must be financed via a net influx of 1.1 TN per year. In theory, this could come from foreign purchases of American portfolio, direct foreign investment in the United States or American sales of foreign assets. In practice, however, most oscillations in the balance of the American current account correspond to the fluctuations in foreign purchases of American portfolio assets. If non -American investors do not want to buy more American assets at their current prices, these prices must drop, the dollar must weaken or (most likely).
These observations would not have as much importance if the American economy should continue to surpass its peers, as it has done for most of the last two decades. But it seems unlikely, at least for the next two years. At Goldman Sachs, we have recently reduced our growth forecasts in all major economies on the back of the price shock, but nowhere more than the United States. We lowered our estimate of American GDP growth in the fourth quarter from 2024 to the same period this year at 0.5%, against 1%. The benefits of GDP and companies increasingly increasing, a strong increase in the measures of the uncertainty of American policies and questions on the independence of the Fed, we expect that non -American investors brake their appetite for American assets.
Dollar damping should not be confused with the loss of the dollar status as a dominant currency in the world. Unless extreme shocks, we believe that the advantages of the dollar as a global support and value reserve support are too rooted for other currencies to overcome. We have had major exchange rate movements without loss of the dominant status of the dollar in the past, and our expectation of reference is that the current decision will not be different.
What are the economic consequences of a lower dollar? First, it will aggravate the upward pressure linked to prices on consumer prices. The prices alone are likely to push central inflation – as measured by the price index of personal consumer expenditure – from 2.75% to 3.5% later this year, and we estimate that damping in dollars could add another percentage point of approximately 0.25. Although this is modest, damping in dollars strengthens our opinion that “the incidence” of higher American tariffs will mainly fall to American consumers, not to foreign producers.
Second, a lower dollar increases not only the prices of imports and consumption, but also export prices (measured in currencies). In the medium term, this relative price change should help reduce the American trade deficit, one of the Trump administration objectives. It is therefore unlikely that political decision-makers will stand for the depreciation of the dollar, even without any type “of the Mar-A-Lago agreement”.
Third, a lower dollar could, in principle, lighten financial conditions and help keep the American economy outside the recession. But the engines of depreciation are important. The reduced appetite for American assets, including treasury securities, could compensate for the impact of a lower currency on financial conditions.
In all cases, the most important determinant to know if the United States is in a recession is not the dollar. The decision to implement additional “reciprocal” rates after the current 90 -day break, an American -based trade war in the American China or aggressive prices specific to goods could make the recession inevitable, regardless of where the Dollar VA.
