(Kitco News) – The U.S. dollar has entered a period of sustained longer-term decline, and as Treasuries fall along with U.S. equities, foreign investors are now reassessing the risk-reward of dollar-denominated assets, according to Kamakshya Trivedi, head of global FX, interest rates, and EM at Goldman Sachs.
“I think the dollar weakness has further to run,” Trivedi told Bloomberg TV on Tuesday morning. “I think it's going to persist, and I think it's going to deepen.”
Trivedi said that so far, most of the dollar’s decline has been seen against the euro, but the Japanese yen could be the next beneficiary. “I think if you start to see some of the data start to weaken, which has actually been quite resilient so far, you might see the yen come back into action as well,” he said. “That's your typical ultra safe haven, and I think that we could be getting back to the low 130s in quick time if the labor market data in the U.S. start to crack as well.”
“I think that's going to tell you whether it's going to be the euro or the yen in the lead,” he added. “But I think dollar weakness is here to stay.”
Asked if this means the U.S. dollar’s decline is a permanent state of affairs, Trivedi characterized it as more of a long-term decline. “I think something has changed here that is fundamental,” he said.
“The first thing that has changed is the prospects for the US economy,” he said. “I think that the risks for recession are unusually large. I think people, and especially foreign investors, are reassessing the prospects for U.S. assets, U.S. dollar assets. I think that's true of equities because of their connection to earnings and to the economy. But […] the breakdown in correlations I think is especially important. If you're a foreign investor in U.S. Treasuries, a big part of the attraction was the hedge value that it provided you. When US equities fell, these assets were meant to rally. If they're not going to do that at a time like this, I think that's really going to be something that people look at. I worry more about the foreign investor just reassessing both the risk and the reward profile of U.S. assets in that context.”
Trivedi was then asked – with spot gold setting a new inflation-adjusted all-time high above $3,500 per ounce on Tuesday morning – whether the ongoing gold price rally was also signaling a sustained move away from the dollar.
“I think gold is certainly telling you [that], and it has been telling you now for some time,” he said. “You've seen the central bank push into gold, and that's been a big source of demand. I think it is telling you that there's a desire to diversify out of dollar assets into a broader range of safe havens. I think gold is one of that.”
“One of the challenges, which is why I think it's too early to write off the dollar as a safe haven, is that there isn't an obvious alternative,” Trivedi added. “That's always been the challenge, that is still the challenge. We continue to think that the dollar's dominant status in global trade flows will persist for a while longer, but that doesn't mean that if the marginal dollar being allocated starts to look for a more diversified set of assets rather than just primarily U.S. dollar assets, that you can’t see this dollar weakness extend. That's what we expect.”
On April 14, Goldman Sachs increased its year-end gold forecast to $3,700 per ounce – up from its previous year-end forecast of $3,300 – citing stronger-than-expected central bank demand and heightened recession risks driving increased ETF inflows.
The investment bank said it expected central bank demand to average 80 tonnes per month, up from its previous projection of 70 tonnes and well above the pre-2022 baseline of 17 tonnes per month. It also noted a surge in gold ETF inflows, driven by fears of a recession, with Goldman’s economists now assigning a 45% probability to a U.S. recession in the next 12 months.
If central bank buying averages 100 tonnes per month, Goldman estimates the gold price could reach $3,810 per ounce by the end of 2025. On the ETF side, if a recession occurs, ETF inflows could revert back to pandemic levels, supporting prices towards $3,880 by year-end.
And on April 7, Goldman Sachs analysts told investors that any pullbacks in the gold price should be seen as an entry opportunity, and they continue to recommend long positions in the metal as their “highest-conviction view in commodities.”
“We maintain our $3,300/oz gold year-end forecast – and our forecast range at $3,250-3,520, reflecting mostly upside risks to investors' positioning,” Goldman analysts wrote in a note. “We continue to see risks relative to our forecast skewed to the upside.”
Further support for the yellow metal will come from structural demand from emerging market central banks, along with increased inflows into exchange-traded funds (ETF) due to recession fears and Federal Reserve rate cuts.
They also noted that gold and other precious metals were exempted from the new tariffs, and they do not expect the Trump administration to tariff them in the future.
Gold remains the bank’s projected standout asset, with the bank seeing the combination of macroeconomic risks and relatively light investor positioning setting the stage for further gains. “We see this – as well as other potential dips in the gold market – as an opportunity for investors to go long gold,” the analysts said.
