Goldman Sachs forex traders: The decline has just begun, and the dollar is entering a new round of depreciation
Goldman Sachs stated that the inquiry into the USD/JPY exchange rate conducted by the New York Federal Reserve on behalf of the U.S. Treasury sent a strong signal to the market, indicating that the U.S. government's concern over the exchange rate level has increased compared to before. Goldman Sachs expects that after the dollar index breaks through a four-year low, it may drop another 4% to 92.75 in the coming months, which corresponds to the euro rising to 1.2450 against the dollar, setting the USD/JPY target at 147
The US dollar index has plummeted over 3% in the past six trading days, marking the largest six-day decline since April 2025. Goldman Sachs' foreign exchange trading team believes that this round of depreciation has just begun, and the dollar index may further drop about 4% to a four-year low of 92.75 in the coming months.
This week, Goldman Sachs foreign exchange traders stated that the three main pillars of the dollar's weakness—yen, renminbi, and euro—are all moving towards a depreciation of the dollar simultaneously. The main driving factor since last Friday has been the New York Federal Reserve's inquiry into the dollar-yen exchange rate on behalf of the US Treasury, a signal that is stronger than the exchange rate inquiries in 2022 or 2024, as the US government is directly involved.
Praneet Shah, head of foreign exchange options at Goldman Sachs, expects that after the dollar index breaks the four-year low, it may fall to 92.75 in the coming months, which corresponds to the euro against the dollar rising to 1.2450, consistent with levels during Trump's first term. The bank has also set a target for the dollar against the yen at 147 but recommends that investors go long on the euro against the dollar for better volatility-adjusted returns.
Shift in US Government's Attitude Towards the Forex Market
Goldman Sachs' trading team pointed out that the US government is taking a more proactive intervention stance in the forex market. The New York Federal Reserve's inquiry into the dollar-yen exchange rate on behalf of the US Treasury has sent a strong signal to the market, indicating that this administration is more concerned about exchange rate levels than previous ones.
The impact of this move has spread to the broader forex market. The movement of the yen has created a ripple effect on other major currency pairs such as the euro and offshore renminbi, which have recently also received macro-level support.
End of the Dollar Exception Narrative
Goldman Sachs has maintained a cautious stance on the dollar for the past six months but now believes that all factors are preparing for the next round of decline. The events involving Trump and Venezuela, as well as the potential impact on Greenland issues, have reignited the narrative of the end of the American exceptionalism.
At the same time, there have been increasing reports of certain European pension funds reducing their exposure to US assets. These combined factors are pushing the dollar index close to breaking the four-year low.
As the dollar continues to weaken, concerns about cross-asset correlations are beginning to resurface. If this adverse correlation persists, it may prompt investors to adjust their forex hedging ratios.
The Australian market has become a hot topic this week. According to data from the Reserve Bank of Australia, the average forex hedging ratio of Australian pension funds is at a historical low of 20%-30%. Last week, Australia's second-largest pension fund, ART Super, indicated it would consider increasing its forex hedging ratio, that is, selling dollars to buy Australian dollars. The pound against the dollar also surged to its highest level since October 2021 today
