What’s Next for the U.S. Dollar

• Clients view the post-election decline of the U.S. dollar as an opportunity driven by expectations of strong global growth and increased risk appetite, rather than a primary concern.
• Dollar weakness is interpreted as reflecting a clear U.S. election outcome and confidence in a global recovery underpinned by safe and effective vaccines, rather than solely domestic U.S. instability.
• Goldman Sachs deems it premature to conclude the U.S. dollar has lost its status as the world's primary safe-haven currency.
• The U.S. retains preeminence due to deep, liquid markets for U.S. Treasuries and institutional strengths demonstrated by a successful election with record participation during a pandemic.
• Competing jurisdictions are strengthening their positions:
  • China is accelerating the internationalization of the renminbi, though Chinese government bonds remain excluded from major indices.
  • The EU's recovery fund issuance marks a step toward fiscal federalism, creating the first euro-denominated safe asset.
• Despite gains by the euro and yuan in sovereign wealth funds and reserve portfolios, the dollar is expected to remain preeminent due to the superior strength of U.S. institutions.

Currency Outlook (G10 and Emerging Markets)

• Analysts anticipate a gradual strengthening of G10 currencies against the dollar, with upside potential concentrated in commodity-linked currencies like the Australian and Canadian dollars.
• The Euro is expected to appreciate versus the dollar as global growth broadens to include Europe.
• The British pound is forecast to appreciate due to the conclusion of a Brexit deal ("thin deal"), which removes uncertainty despite the deal's limitations.
• A weaker dollar generally benefits emerging markets by easing financial conditions for dollar-borrowing nations.
• Emerging market debt issuance has reached approximately $110 billion since April 2020, significantly higher than the typical $75 billion seen in previous years.
• Emerging market currency recovery is expected to be uneven, as many policymakers prioritize domestic economic support and rate cuts over currency defense amidst local COVID-19 outbreaks.
• Divergent policies in Latin America are creating distinct currency performances:
  • The Mexican peso has recovered strongly due to conservative monetary and fiscal stances.
  • The Brazilian real has weakened considerably against the dollar due to looser monetary and fiscal policies.

Alternative Asset Classes and Hedges

• Gold is viewed as an appropriate hedge against equities and cyclical exposures as government bond yields in developed markets fall into negative territory, reducing their effectiveness as diversifiers.
• Gold correlates with real yields and is increasingly utilized by investors seeking alternatives to bonds for portfolio hedging.
• The Japanese yen serves as an additional hedge asset due to its lack of correlation with other major asset classes.
• Non-sovereign digital currencies like Bitcoin are considered similar to gold and may warrant a role in certain portfolios.
• Digital currencies currently do not denominate assets or engage in significant economic transactions, preventing them from challenging the dollar as a reserve currency.
• The potential launch of central bank digital currencies (CBDCs) by various nations is identified as a significant development to monitor.

2021 Market Projections

• Goldman Sachs economists predict 6.1% global economic growth for 2021.
• The firm forecasts strong performance for equity indices, commodities, and emerging markets based on the growth backdrop.
• A weakening U.S. dollar is a central component of the 2021 outlook driven by the global growth narrative.
• Regulatory frameworks remain a key uncertainty; while drastic deregulation occurred four years prior, future changes are unclear.
• The combination of strong U.S. growth and global expansion is expected to generate numerous market opportunities and disruptions.