Goldman Sachs Warns of Accelerating U.S. Dollar Decline Amid Global Shifts

Goldman Sachs has issued a warning about an impending storm in the global financial landscape, predicting an accelerating decline in the U.S. dollar. The bank's global head of repurchase trading, who also serves as the co-head of short-term macro trading, emphasized that the increased foreign exchange hedging by overseas investors could intensify the dollar's downward spiral. This trend, along with a rise in foreign exchange hedging ratios and the purchase of U.S. bonds through hedging mechanisms, is expected to become more prevalent than it was a year ago.

The Bloomberg Dollar Index has already plummeted by over 8% this year, marking its worst start to a year on record. The volatile policies of the Trump administration have unsettled global markets, eroding investor confidence. Over the past decade, foreign investors have doubled their holdings of U.S. securities, including stocks, government bonds, and corporate bonds, to a staggering 31 trillion dollars. However, there are no immediate signs of a mass exodus from the U.S. bond market by foreign investors. The bank's executive predicts that foreign demand for U.S. debt will gradually wane as European countries ramp up their fiscal borrowing and spending, making the euro a more attractive reserve currency. European investors may increasingly prefer to stay within their domestic markets.

The executive noted that investors are leaning towards nationalist and localized investments rather than turning to the dollar. This shift could leave the U.S. more reliant on domestic buyers to absorb its growing debt and more dependent on enhancing financial intermediation to leverage the system. The challenge of finding buyers for the ballooning debt is not unique to the U.S. but a global issue, as highlighted by the rate strategy head of Bridgewater Associates. The executive pointed out that the U.S. 10-year Treasury has been the best-performing major bond market this year.

The executive analyzed that from 2015 to 2022, private investors in Europe, Japan, the U.K., and the U.S. had a net bond purchase quantity of nearly zero due to central banks absorbing bond supply through quantitative easing. However, as central banks reverse course to combat inflation by reducing their bond holdings, this dynamic has changed. The executive emphasized that the most significant shifts in bond supply and demand are not occurring in the U.S. but in Japan and European markets, which are undergoing more substantial structural adjustments.

As governments worldwide race to expand their debt levels, gold has emerged as a significant beneficiary. The executive added that gold has been the biggest winner as global governments compete to increase their debt burdens. The executive noted that investors are leaning towards nationalist and localized investments rather than turning to the dollar. This shift could leave the U.S. more reliant on domestic buyers to absorb its growing debt and more dependent on enhancing financial intermediation to leverage the system. The challenge of finding buyers for the ballooning debt is not unique to the U.S. but a global issue, as highlighted by the rate strategy head of Bridgewater Associates. The executive pointed out that the U.S. 10-year Treasury has been the best-performing major bond market this year.