Goldman Sachs has indicated that foreign investment in U.S. dollar assets may decline unless the dollar depreciates further. Chief economist Jan Hatzius expressed this concern, noting that the dollar remains highly valued. He predicts that foreign investors will be less inclined to increase their U.S. asset holdings moving forward. Despite the United States retaining advantages like higher productivity compared to Europe, Hatzius points out that the country’s relative economic performance is beginning to diminish.
This decline is expected to be most visible in the currency markets. Presently, the U.S. faces a current account deficit exceeding a trillion dollars, indicating a dependence on foreign demand to finance its trade shortfall. With foreign investments already constituting a significant part of U.S. asset portfolios, sustaining funding requirements will be challenging without a depreciation of the dollar. Since President Donald Trump’s inauguration, the dollar index has decreased by approximately 9%, influenced by investor concerns over the administration’s tariff policies.
While the market has speculated about a potential economic contraction in the U.S. due to these protectionist measures, Hatzius believes the dollar will likely decline irrespective of whether a recession occurs. Even moderate rate cuts by the Federal Reserve, rather than aggressive reductions, may prompt this depreciation. The Fed’s upcoming rate-setting meeting could lead to cuts, but Hatzius emphasizes the current constraints posed by inflationary effects from tariffs. Recently, Fed officials hinted at openness to rate reductions if inflationary pressures diminish.
Goldman Sachs anticipates a contraction in U.S. economic growth in the first quarter, although it is not forecasting an outright recession for the year. The advance GDP estimate is expected to show a notable slowdown.