FOREX: Goldman Sachs Upgrades USD Forecasts

Goldman Sachs: "USD: All systems still go; upgrading our Dollar forecasts. In our 2025 Outlook, we wrote that we expected the Dollar to be “stronger for longer” because of a combination of solid US growth, continued support for capital inflows, and more protectionist policies. Since then, the Dollar has appreciated even faster than we expected. This has been largely on the back of a shift higher in US policy rate expectations, which tends to be the most supportive environment for the currency. Looking ahead, the critical questions are to what extent these moves will be validated by the incoming data, and whether they already incorporate our expectations for policy shifts in the coming year, particularly higher tariffs. While we acknowledge that FX market participants are clearly expecting some degree of tariff policy changes, and it is difficult to disentangle the drivers of recent moves, we maintain that there is more Dollar strength ahead. In our view, there are three key considerations. First, it is challenging—if not impossible—for FX markets to fully price tariff risks ahead of time because movements in the CNY fix will be critical for the size and composition of the broad market reaction. Second, our models assume a negative growth response to these trade policy shifts, but so far the market has instead upgraded the US growth view since the election. So, even if markets are already fully incorporating tariff risks, there is still some Dollar upside relative to our previous assumptions. Third, and most timely today, we believe that much of the recent Dollar strength reflects the surprising resilience in the US economy and shifting policy expectations. Inflation and labor market outturns have led our economists to make two revisions to their policy path for the Fed in the last month, and they now expect more of a “pause” than a “skip.” As a result, we are upgrading our Dollar forecasts. 

We expect the Dollar to rally by about 5% over the coming year on the realization of new tariffs and continued US outperformance. Even with this upgrade, we still see the risks tilted towards more Dollar strength for three reasons. First, if the economic resilience continues despite higher tariffs, markets could begin to price more two-sided risks around the direction of the next policy move, and this becomes increasingly likely under a longer pause like the one we are now forecasting. Second, our tariff baseline is narrower than recent media reports suggest that the incoming administration is considering; even a targeted universal tariff rate would be more aggressive than we have been expecting if enacted together with higher tariffs on China. Third, it is possible that the shift higher in rate expectations will be more disruptive for rates-sensitive economies, and we think some of the recent moves in places like GBP demonstrate that this risk is starting to impact FX markets. In this vein, we are extending the target on our long USD/SEK trade recommendation to 11.60, in line with our new 3m forecast, and revising the stop to 11.00 to lock in gains."