Former US Treasury Secretary John Connally once famously said: "Our currency, your problem." Will the "return of the king" dollar in 2025 continue to be the global "troublemaker"?

On the 15th, Goldman Sachs analyst Kamakshya Trivedi's team released a key report titled "Stronger for Longer" on the 2025 global forex outlook. The research report points out that with changes in the global economic and policy environment, the "strong dollar" will be the main theme of the forex market in 2025, and this trend will persist for a long time.

Specifically, the United States may implement broader tariffs and fiscal policy adjustments in the coming year, which will further enhance the competitiveness of the dollar and suppress the performance of other "challenger" currencies. In addition, the skewness of capital flows and the resilience of the US economy provide solid support for the dollar.

However, the "strong dollar" is not without flaws. If global economic growth exceeds expectations, or if uncertainty in trade policy diminishes, it could bring downside risks to the strong dollar.

Regarding other currencies, against the backdrop of the dollar's "solo show," other major currencies will face more uncertainties. Goldman Sachs expects that in 2025, the euro will weaken further, possibly even falling below parity. Japan, the British pound, and others will also face downward pressure.

The "strong dollar" returns once more, supported by three main pillars

Goldman Sachs believes that there are three main reasons supporting the strength of the dollar:

First of all, the US economy still has resilience. Goldman Sachs pointed out that in 2025, the US economic growth is expected to be higher than that of major developed economies, accompanied by high-return asset markets (such as stocks, bonds) and low unemployment rates, all of which will attract more capital inflows into US dollar assets.

Secondly, capital flows in the strong US dollar environment have a clear "siphon effect." The US dollar remains dominant as the global trade and reserve currency, further consolidating its strong performance.

Goldman Sachs stated that international investors will allocate more capital to the United States in search of higher returns. This capital flow trend not only strengthens the strong position of the US dollar but also further suppresses the performance of other currencies.

"As the overvaluation of the US dollar for most of the past decade has been driven by superior risk-adjusted returns, attracting portfolio inflows from other developed market economies, we still believe that an end to the cyclical rise of the US dollar will require better overseas capital returns."

For example, during the period 2023-2024, the United States attracted over 350 billion US dollars of cross-border capital inflows, with most flowing into the stock market and US dollar-denominated bonds. This trend is expected to continue in 2025.

Finally, tariff policies further support the US dollar by changing trade conditions and capital flows. As mentioned earlier, tariffs increase costs for foreign exporters, while reducing the competitive pressure on US domestic manufacturing, increasing export attractiveness; in addition, with the increase in returns on US dollar assets, more international capital will flow into the US market.

Will Trump's tariff policy return, this time "faster" and "more direct"?

Goldman Sachs pointed out in the report that the Trump administration may reintroduce "tariff weapons" during its second term, especially trade measures against its main "challengers", which will be a core variable in the global foreign exchange market in 2025.

"Our economists expect the policy combination to effectively increase the cost of imports to the USA and reduce domestic operating costs. This is a powerful combination for the US dollar, especially as it further supports those established pillars of US dollar strength."

The core logic of tariff policy is to promote the competitiveness of domestic manufacturing by increasing the cost of imported goods, thereby attracting more capital inflow into the USA.

During Trump's first term, his trade war had already left a deep impression on the market. From 2018 to 2019, the USA implemented a series of tariff measures against its major trading partners, not only affecting the international trade structure but also directly impacting the global foreign exchange market.

By 2025, Goldman Sachs believes that the Trump administration may adopt a more rapid and direct tariff policy.

Goldman Sachs expects the USA to impose additional tariffs on Chinese exports, which may also expand to other countries with significant trade deficits with the USA. This will significantly increase the prices of imported goods.

It is worth noting that, unlike the policy pattern of the first term, Goldman Sachs believes that this round of tariff measures may initially focus on a single country, but the scope will gradually expand to other countries. This progressive policy of expansion will intensify market uncertainty, significantly increasing volatility in the foreign exchange market.

In addition to tariffs themselves, Goldman Sachs emphasizes that the policy combination of the US economy - including tariffs, fiscal stimulus, and support for domestic manufacturing - will further strengthen the global attractiveness of the US dollar.

"These policies will effectively increase the valuation of the US dollar, while strengthening the dominant position of the US dollar by limiting foreign returns and suppressing the performance of other currencies."

Outlook for other major currencies: The US dollar stands out on its own, while other major currencies face internal and external difficulties.

A strong US dollar will bring more uncertainty to the global economy, triggering currency conflicts. Goldman Sachs believes that although countries find it difficult to reach a consensus on currency agreements, adjusting monetary policies will become an important means for countries to deal with this challenge.

Against this background, Goldman Sachs has provided a detailed analysis of the prospects for other major currencies, pointing out that many currencies will face significant depreciation pressure.

Regarding the Euro, Goldman Sachs believes that the Eurozone currently faces two major challenges: economic fragility and trade policy uncertainty. The economic recovery in the Eurozone is slow, and US tariff policies may further impact Europe's export-oriented economy.

Goldman Sachs predicts that by 2025, the Euro against the US dollar will weaken further, possibly even falling below parity. In the short term, Eurozone policymakers may adopt loose monetary policies to deal with tariff impacts, further depressing the Euro exchange rate.

Regarding the Japanese Yen, Goldman Sachs expects that although the Federal Reserve will continue to cut interest rates and the Bank of Japan will continue to raise rates, Japan, like other major currencies, faces depreciation pressure. The theme of the "US exceptionalism" may continue to be a focal point.

"The combination of stable US interest rates and rising stock markets is often a negative factor for the Yen. When the market is particularly focused on the stronger growth prospects in the US, the Yen tends to weaken."

Regarding the British Pound, despite the UK's fiscal stimulus policies and economic resilience providing some support for the British Pound, in the long term, the Pound's overvaluation will limit its further appreciation. Goldman Sachs predicts that the Pound against the US dollar may remain relatively strong in the short term, but in the second half of 2025, it may face downward pressure due to reduced economic growth expectations.

Other emerging market currencies such as the Indian Rupee, Brazilian Real, etc. will be influenced to varying degrees by the US economy and policies. The Indian Rupee may show relatively stable performance.

Potential Risks: The "strong dollar" is not invulnerable.

Although Goldman Sachs is optimistic about the outlook for the US dollar, it also points out that there are some potential risk factors that could weaken the strong position of the US dollar.

First, if the economic recoveries of Europe and China exceed expectations, it may rebalance global capital flows, weakening the attractiveness of the US dollar. In particular, if China stimulates domestic demand through large-scale stimulus plans, it may provide support to the Renminbi.

Goldman Sachs specifically points out two key periods of sustained depreciation of the US dollar, which occurred after the 2017 and 2021 US elections:

"In 2017, the depreciation of the dollar was closely related to portfolio inflows into the Eurozone, while the growth in the Eurozone unexpectedly strong. This is likely a result of the 2016 Chinese stimulus policy catalyzing."

In 2021, less than a week after the US election, the latest medical discoveries were the reasons for the changes in sentiment and growth results.

Secondly, if the Federal Reserve increases the rate cut due to increased economic pressure, this may to some extent suppress the appreciation of the US dollar. Furthermore, if the US adopts more protectionist measures due to an expanding trade deficit, it may lead to increased market risk aversion, intensifying US dollar volatility.

Finally, Goldman Sachs emphasized that there is still uncertainty in the market towards tariff policies. If the market's concerns about Trump's tariff policies ease, other major currencies may rebound in the short term, posing a challenge to the strong US dollar.

Editor/ping