The US dollar, already weakened by tariff uncertainty and recession fears, is expected to continue to weaken, according to Goldman Sachs Chief Economist Jan Hatzius.
The major currency fell more than 4.5% in April, its biggest monthly decline since late 2022. The decline has sparked speculation of a crisis of confidence in the world's main reserve currency.
So far this year, the US dollar has fallen 8% against a basket of major currencies. Hatzius expects further depreciation could exacerbate price pressures, especially as existing tariffs are already contributing to inflation.
In an article, Hatzius said that a weaker dollar could potentially reduce the US trade deficit and protect the economy from recession. However, he warned that the factors that are causing the dollar's decline could negate the positive impact on financial conditions.
The International Monetary Fund (IMF) estimates that non-US investors hold around US$22 trillion in US assets, which could account for a third of the total combined portfolio. Half of this is believed to be in the form of equities, which are typically unhedged against currency movements.
Hatzius also highlighted the US current account deficit of US$1.1 trillion, which needs to be balanced by an equal amount of net capital inflows each year. This is typically achieved through purchases of US assets by foreign investors and any halt to these purchases could have a negative impact on the US dollar.
However, the impact of these factors would be reduced if the US economy continued to outperform other economies, but that is unlikely to happen. The IMF recently forecast US economic growth to decline by one percentage point to 1.8% in 2025, down from 2.8% last year.
While the US dollar is expected to continue to weaken, Hatzius does not believe this signals the loss of its status as the world’s reserve currency.
