USD: Goldman Sachs On USD Depreciation Risks

Goldman Sachs: "What if this is as good as it gets? Following a bigger reduction in US-China tariff rates than expected, our colleagues have upgraded growth forecasts and equity return targets. In FX, we are not making any material changes to our view, aside from some tactical shifts in risk-sensitive currencies such as JPY and AUD. Despite a somewhat brighter US outlook, we still expect the Dollar to weaken. There are a few reasons for this. First, while we have modestly lowered our tariff rate assumptions with a commensurate decline in recession risks, they are still settling in a much more protectionist area than our assumptions from a few months ago. And we think this is more of a local low than a whole new direction for trade policy. If this is peak optimism, we do not think it fully addresses our concerns for the Dollar. Tariffs around here will still weigh on US consumers' real incomes and US firms' margins, and the uncertainty will likely continue to loom large in spending and pricing decisions. Second, despite the changes in targets, our equity colleagues still see more balanced return prospects globally, and note that returns so far this year should underscore the value of more globally diversified portfolios. That is not a high bar considering we entered 2025 with US allocations at the highs and USD hedging ratios at the lows. Third, when it comes to the swift change in US policy and, in turn, our economic forecasts, the back and forth is part of the point in our FX outlook. We expect this uncertainty will continue to prompt investors and savers alike to rethink their USD FX exposure. We continue to think that riskier parts of G10 and emerging markets will lead the next phase of Dollar depreciation, and we think near-term impulses favor CNH and a diversified basket of EM carry, with JPY and EUR serving as portfolio hedges in an environment with “lower but not low” recession risks."