Goldman Sachs Outlook 2025 Global Foreign Exchange Market: The Era of "Stronger and Longer Dollar" Has Arrived, Non-U.S. Currencies Face "Internal and External Difficulties" Under Tariff Pressure

Former U.S. Treasury Secretary John Connally once famously said, “Our currency, your problem.” Will the dollar, which is set to "make a comeback" in 2025, continue to be a "troublemaker" globally?

On the 15th, a team of Goldman Sachs analysts led by Kamakshya Trivedi released a significant report titled “Stronger for Longer,” outlining the global foreign exchange outlook for 2025. The report indicates that with changes in the global economic and policy environment, a "strong dollar" will become the main theme of the foreign exchange market in 2025, and this trend will last for a considerable time.

Specifically, the U.S. may implement broader tariff 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. Additionally, the tilt of capital flows and the resilience of the U.S. economy provide solid support for the dollar.

However, the "strong dollar" is not without its vulnerabilities. If global economic growth exceeds expectations or if trade policy uncertainties diminish, it could pose downside risks to the dollar's strength.

Regarding other currencies, in the context of the dollar's "one-horse race," other major currencies will face more uncertainties. Goldman Sachs predicts that in 2025, the euro will further weaken and may even fall below parity. The Japanese yen and the British pound will also face downward pressure.

The Return of the "Strong Dollar" Supported by Three Pillars

Goldman Sachs believes that the reasons supporting the dollar's strength can be summarized in three main points:

First, the U.S. economy remains resilient. Goldman Sachs points out that the economic growth forecast for the U.S. in 2025 is higher than that of major developed economies, coupled with high-return asset markets (such as stocks and bonds) and a low unemployment rate, all of which will attract more capital into dollar-denominated assets.

Second, capital flows in a strong dollar environment exhibit a clear "siphoning effect." The dollar remains the dominant currency for global trade and reserves, and this status further solidifies its strong performance.

Goldman Sachs states that international investors will direct more capital towards the U.S. in search of higher yields. This trend in capital flows not only reinforces the dollar's strong position but also further suppresses the performance of other currencies.

“Due to the high valuation of the dollar for most of the past decade, stemming from superior risk-adjusted returns that attracted portfolio inflows from other developed market economies, we still believe that the end of the dollar's cyclical rise will require better capital returns overseas.”

For example, during the period of 2023-2024, the U.S. attracted over $350 billion in cross-border capital inflows, most of which flowed into the stock market and dollar-denominated bonds. This trend is expected to continue into 2025.

Finally, tariff policies further support the dollar by altering trade conditions and capital flows. As mentioned earlier, tariffs increase the costs for foreign exporters while reducing competitive pressure on U.S. domestic manufacturing, enhancing export attractiveness; moreover, as the returns on dollar assets increase, more international capital will flow into the U.S. market

Trump's Tariff Policy Returns, This Time "Faster" and "More Direct"?

Goldman Sachs pointed out in a report that the Trump administration may once again activate the "tariff weapon" during its second term, especially trade measures targeting its main "challengers," which will become a core variable in the global foreign exchange market in 2025.

"The policy mix anticipated by our economists will effectively increase the cost of U.S. imports and lower the costs of domestic operations. This is a strong combination for the dollar, particularly as it further supports those already established pillars of dollar strength."

The core logic of the tariff policy lies in promoting the competitiveness of domestic manufacturing by increasing the cost of imported goods, thereby attracting more capital inflow into the United States.

During Trump's first term, his trade war had already left a deep impression on the market. From 2018 to 2019, the U.S. implemented a series of tariff measures against its major trading partners, which not only affected the structure of international trade but also directly impacted 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 that the U.S. will impose additional tariffs on Chinese exports, which may also extend to other countries with significant trade deficits with the U.S. This will significantly increase the prices of imported goods.

It is noteworthy that, unlike the policy model of the first term, Goldman Sachs believes that this time the tariff measures may initially focus on a single country, but the scope will gradually expand to other countries. This gradual expansion of policy will exacerbate market uncertainty and significantly increase volatility in the foreign exchange market.

In addition to the tariffs themselves, Goldman Sachs emphasizes that the policy mix of the U.S. economy—including tariffs, fiscal stimulus, and support for domestic manufacturing—will further enhance the global appeal of the dollar.

"These policies will effectively increase the valuation of the dollar while reinforcing its dominance by limiting foreign returns and suppressing the performance of other currencies."

Outlook for Other Major Currencies: The Dollar "Shines Alone," Other Major Currencies "Struggle Internally and Externally"

A strong 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, adjustments in monetary policy will become an important means for countries to respond to this challenge.

In this context, Goldman Sachs has analyzed the prospects for other major currencies in detail, 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 vulnerability and uncertainty in trade policy. The economic recovery in the Eurozone is sluggish, and U.S. tariff policies may further hit the export-oriented economy of Europe.

Goldman Sachs expects that by 2025, the euro will further weaken against the dollar, and may even fall below parity. In the short term, Eurozone policymakers may adopt loose monetary policies to respond to the tariff shocks, which will further depress the euro exchange rate.

As for the yen, Goldman Sachs expects that despite the Federal Reserve continuing to cut interest rates and the Bank of Japan continuing to raise rates, Japan, like other major currencies, faces depreciation pressure. The theme of "American exceptionalism" may continue to be in focus

"The combination of stable U.S. interest rates and rising stock markets is often a negative factor for the yen. When the market is particularly focused on a stronger growth outlook for the U.S., the yen typically weakens."

Regarding the British pound, although the UK's fiscal stimulus policies and economic resilience provide some support for the pound, its high valuation will limit further appreciation in the long run. Goldman Sachs expects the pound to remain relatively strong against the dollar in the short term, but it may face downward pressure due to a downgrade in economic growth expectations in the second half of 2025.

Other emerging market currencies such as the Indian rupee and Brazilian real will be affected to varying degrees by the U.S. economy and policies. The Indian rupee may perform relatively robustly.

Potential Risks: "Strong Dollar" is Not Flawless

Although Goldman Sachs holds an optimistic outlook for the dollar, it also points out some potential risk factors that could weaken the dollar's strong position.

First, if the economic recovery in Europe and China exceeds expectations, it could rebalance global capital flows and weaken the dollar's appeal. In particular, if China boosts domestic demand through large-scale stimulus plans, it could provide support for the renminbi.

Goldman Sachs specifically highlighted two significant periods of sustained dollar depreciation, which occurred after the U.S. elections in 2017 and 2021:

"In 2017, the dollar's depreciation was closely related to portfolio inflows into the Eurozone, where growth was unexpectedly strong. This was likely a result of the stimulus policies in China in 2016.

In 2021, less than a week after the U.S. elections, the latest medical findings were the reason for the shift in sentiment and growth outcomes."

Second, if the Federal Reserve increases the rate of interest rate cuts due to economic pressures, this could somewhat suppress the dollar's appreciation. Additionally, if the U.S. takes more protectionist measures due to an expanding trade deficit, it could lead to increased market risk aversion, exacerbating dollar volatility.

Finally, Goldman Sachs emphasizes that there is still uncertainty regarding the market's attitude towards tariff policies. If concerns about Trump's tariff policies diminish, other major currencies may rebound in the short term, posing a challenge to the dollar's strength