Goldman Sachs strategists say the U.S. dollar could be quietly building upward pressure despite an appearance of recent calm in the trade-weighted measure of the currency. They argue that the flat headline reading masks more significant underlying moves driven by shifts in terms of trade.
Two main drivers are in play, according to the strategists: an ongoing energy shock and demand linked to artificial intelligence. While these forces pull growth in opposite directions, both tend to push inflation higher - a pattern that Goldman says is consistent with its macro outlook. As the note puts it, "Our global growth expectations have been roughly stable since the middle of March, despite a longer conflict, while inflation projections have continued to drift higher."
The strategists highlight a specific pathway through which the dollar could strengthen further. "The clearest risk for a stronger Dollar is if a wider energy shock begins to pressure growth, policy, and prospective returns in other developed countries, particularly Europe," they wrote. Under that scenario, reduced growth and tighter policy conditions abroad could make the dollar relatively more attractive.
Goldman frames the dollar's recent range-bound behavior as the result of competing pressures. On one side are commodity-forward, cyclical currencies that typically respond to changes in commodity prices. On the other are heavily managed Asian FX markets. Intervention activity in places such as Japan and India has acted to hold down the dollar, despite fundamentals that would otherwise support U.S. strength. The strategists observed that such active policy measures are unlikely to persist without a meaningful shift in the macro backdrop.
The note points to last week's increase in the dollar following upside U.S. inflation surprises, which lifted global bond yields, as an example of how swiftly the currency can move when underlying vulnerabilities re-emerge. Limited macro developments from the Trump-Xi summit, coupled with continued constraints on energy flows, reinforced the dollar's relative resilience in the strategists' view.
Looking ahead, Goldman said that if risk sentiment remains broadly supportive, the recent pattern of a divided dollar is likely to continue - with high-beta commodity-exporter currencies leading gains and rate-sensitive commodity importers lagging. To position for such an environment, while protecting against a disruptive shock, the strategists favor a long basket of the Brazilian real, Hungarian forint, Mexican peso, and South African rand, financed by positions in the euro, Swedish krona, and Thai baht.
Finally, Goldman notes that the combination of higher inflation and resilient growth has already pushed yields upward. They add that any additional concern about the persistence of the energy shock "should continue to drive relative returns consistent with shifting terms of trade," a trajectory the strategists say would underpin widespread dollar strength across G10 currencies.
Key points
- Goldman sees underlying appreciation pressure in the U.S. dollar despite a flat trade-weighted headline.
- An ongoing energy shock and AI-driven demand are the main forces shifting terms of trade and lifting inflation projections.
- Strategists recommend being long a basket of BRL, HUF, MXN, and ZAR funded by EUR, SEK, and THB to position for the described environment.
Risks and uncertainties
- A broader energy shock could impair growth, policy, and returns in other developed markets, especially Europe, which would tend to strengthen the dollar.
- Active currency intervention in markets such as Japan and India has so far tempered dollar strength; those policies could continue to distort FX moves until the macro backdrop changes.
- Further U.S. inflation surprises or changes in global bond yields could prompt rapid dollar appreciation, altering relative returns across currencies and markets.