Goldman Sachs: The dollar is still overvalued by about 15% in 2026, and the revaluation of technology "exceptionalism" is a significant downside risk

Goldman Sachs conveyed a clear signal to the market in its 2026 Global Foreign Exchange Outlook: the dominance of the dollar is loosening, but it has not yet collapsed.

According to the Wind Trading Desk, on January 10, Goldman Sachs' Kamakshya Trivedi team released a research report stating that its core logic is that although the current valuation of the dollar is still overvalued by about 15% according to Goldman Sachs' GSDEER model, and the economic performance advantage of the U.S. relative to other regions is narrowing, this does not mean that the dollar will collapse immediately.

Goldman Sachs' baseline scenario is that the dollar will experience a "slow downward process," driven by relatively strong global growth and more balanced asset returns. However, for investors, the most concerning tail risk does not come from traditional macroeconomic data, but from structural changes in the capital markets—if the "exceptionalism" of U.S. tech stocks faces a revaluation, such as a moment similar to "DeepSeek 2.0," leading to capital no longer flowing into U.S. assets, then the dollar will face a sharp depreciation far beyond expectations.

In addition, Goldman Sachs believes that foreign exchange trading opportunities in 2026 will be more reflected in pro-cyclical currencies and specific emerging market currencies, rather than purely in dollar short trades.

The Slow Retreat of the Dollar and the Sword of Damocles Over Tech Stocks

Goldman Sachs' core view is based on a long-term judgment that the weakening of the U.S. relative advantage will ultimately lead to a weaker dollar.

Although the dollar experienced a significant decline in 2025 and then consolidated due to the resilience of the U.S. economy, Goldman Sachs expects this tug-of-war to repeat in 2026. On one hand, robust global growth and improved risk sentiment are typically negatively correlated with the dollar; considering the high valuation accumulated by the dollar over the past decade, such an adjustment is reasonable. On the other hand, Goldman Sachs' economists have a much higher growth forecast for the U.S. in 2026 than the market consensus, which means that the performance of the U.S. economy may be sufficient to maintain the high valuation floor of the dollar.

However, the downside risks facing the dollar are not just cyclical adjustments in the macroeconomy.

Goldman Sachs specifically pointed out that the key factors supporting the dollar's high valuation and financing the U.S. current account deficit in recent years have been the fervent demand from global investors for the U.S. stock market, especially tech stocks. Although Goldman Sachs expects productivity gains from artificial intelligence to continue, the key question is whether these gains will spread globally and whether capital returns can match the currently high valuations of tech stocks.

If the market's faith in U.S. tech "exceptionalism" wavers, even if just a moment of technological iteration challenges existing expectations, it could trigger a reversal in capital flows, posing a significant blow to the dollar.

The Euro's Return to Fair Value and the Structural Dilemma of the Pound

Among G10 currencies, the outlook for European currencies shows significant differentiation.

After a strong performance in 2025, the euro's exchange rate against the dollar is now close to "fair value," and even slightly overvalued on a broad basis. Goldman Sachs believes that the further upward momentum of the euro will mainly come from the broad weakness of the dollar, rather than explosive growth in the Eurozone itself. Nevertheless, increased European fiscal spending and the diversification of global investment portfolios will still support the euro, allowing it to rise moderately along with the dollar's downward trend In contrast, the outlook for the British pound appears bleak. Goldman Sachs bluntly labeled the pound as the "laggard" of Europe. According to the GSDEER model, the pound is the most structurally overvalued currency among the G10.

The pressure for fiscal consolidation in the UK and the weak domestic cyclical outlook leave the pound fundamentally unsupported. More critically, Goldman Sachs predicts that the Bank of England's rate cuts in 2026 will exceed market pricing, with three 25 basis point cuts expected before the end of the year. This policy divergence will lead to the pound underperforming its European peers, and Goldman Sachs advises investors to short the pound in cross trades, such as going long on the euro against the pound.

The Tech Wave and Valuation Divergence: Goldman Sachs' View of the New Landscape for Asian Currencies

In the Asian market, Goldman Sachs paints a picture driven by the tech cycle and valuations.

Goldman Sachs is optimistic about low-yield Asian currencies closely related to the tech supply chain, such as the South Korean won, New Taiwan dollar, and Malaysian ringgit, believing they will outperform high-yield currencies like the Indonesian rupiah and Philippine peso by 2026. In particular, the South Korean won will benefit not only from the investment boom related to AI but will also see hundreds of billions of dollars in passive inflows due to its inclusion in the FTSE World Government Bond Index (WGBI) in 2026. Additionally, the National Pension Service of Korea (NPS) is restarting its foreign exchange hedging program, which is expected to bring about $50 billion in dollar forward selling, further supporting the won's exchange rate.

Carry Trade and Cyclical Opportunities in Emerging Markets

For emerging market investors seeking high yields, Goldman Sachs recommends focusing on currencies with improving fundamentals and attractive valuations.

Despite facing political noise, the Brazilian real and Colombian peso still offer considerable carry trade opportunities due to their high real interest rates and undervalued exchange rates. In particular, the South African rand, Chilean peso, and Peruvian sol are not only undervalued but, as pro-cyclical currencies, will benefit from rising global commodity prices (especially the divergence of metal prices relative to energy prices) and robust growth in the Chinese economy.

Goldman Sachs emphasizes that in the current environment of implied volatility, using options and other tools to position for the volatility of these currencies is also a cost-effective strategy, as current market pricing clearly underestimates potential macro uncertainties.