Goldman Sachs Abandons Broad Dollar Weakness Call: New Forecasts and the Key Drivers Behind the Shift

What Triggered the Reversal

The retreat from the broad dollar weakness call was driven by several converging factors:

• A stronger-than-expected U.S. labor market was the primary catalyst. By June 2026, Goldman Sachs economists no longer expected any Fed rate cut in 2026, pushing the final two cuts to 2027 . This directly undermined the core premise that the Fed would ease aggressively and weaken the dollar.
• A hawkish Fed pivot followed. The Federal Reserve held rates at 5.25%–5.50% in June 2026, and Goldman revised its forecast to just one 25 basis point cut in December 2026, removing earlier expectations of multiple cuts .
• The fading "end of American exceptionalism" thesis played a key role. In April 2025, Goldman had declared that "US exceptionalism" was over, citing tariffs, policy uncertainty, and recession fears as rationale for a structural dollar decline . By mid-2026, the U.S. economy proved more resilient than expected, forcing a recalibration.
• Reduced tariff drag and tax cuts also contributed. Goldman's July 2026 outlook notes the U.S. is likely to outperform global growth (2.6% vs. 2.0% consensus) because of reduced tariff drag, tax cuts, and easier financial conditions — all dollar-supportive .
• A narrowing of the "supply shock" changed the outlook. By April 2026, Goldman noted that an unexpectedly muted supply shock from Middle East disruptions was reshaping the dollar outlook, making the case for delayed rather than immediate dollar weakness .

New Currency Forecasts

Goldman Sachs's latest known forecasts reflect a shallower and more delayed dollar descent than previously projected:

The January 2026 report titled "Different Dollar Downside" encapsulates the shift: the dollar fell sharply in 2025 and remains ~15% overvalued, but the descent in 2026 is expected to be shallower than previously forecast .

Key Drivers Behind the Revision

1. Resilient U.S. labor market — a stronger-than-expected jobs picture pushed Goldman to scrap its 2026 Fed cut call entirely .
2. Sticky inflation — rising prices and inflation expectations forced the Fed to hold steady, with Goldman's asset management unit even projecting ECB rate hikes .
3. Stronger U.S. growth — Goldman now expects U.S. GDP growth of 2.6% in 2026 vs. 2.0% consensus, supported by tax cuts and reduced tariff drag .
4. Fading recession fears — the "non-recessionary" environment means Fed cuts are delayed, removing a key driver of earlier bearish dollar bets .
5. Global growth divergence — the rest of the world is performing better than expected, but the U.S. is still outperforming, creating a more balanced rather than one-sided dollar-negative picture .

The Divided Nature of the Dollar Outlook

The outlook is sharply divided across time horizons and between desks at Goldman Sachs:

• Short-term (H1 2026): Goldman described the dollar as "volatile" in H1 and "rangebound" in H2 . Some internal notes suggested a hawkish Fed pivot could strengthen the USD in the near term as a "credibility premium" .
• Medium-term (2026–2027): Still bearish, but the descent is "shallower" and "different" — not the broad rout previously predicted .
• Long-term structural: Goldman still believes the dollar is ~15% overvalued and that demand for U.S. assets is diminishing . The multiyear trend of dollar strength has broken .
• Internal divide: The bank's FX strategy team (Trivedi, Cahill) maintains a long-term bearish structural view , while its economists (Hatzius, Mericle) revised the Fed outlook sharply higher, directly constraining the bearish FX thesis . Goldman Asset Management's June 2026 Market Pulse even flagged potential USD strength from the hawkish FOMC pivot .

Associated Risks

Several risk factors could disrupt this outlook:

• Tariff escalation risk: Renewed trade tensions could reignite recession fears and volatility, but could also be dollar-negative if they hurt U.S. growth disproportionately .
• Energy / supply shock risk: Middle East disruptions remain a key wild card; a significant supply shock could upend the inflation and rate outlook .
• Fed miscommunication risk: If the Fed pivots dovish sooner than Goldman now expects, the dollar could resume its decline faster than forecast.
• "Risk currency" behavior: Goldman has warned that the dollar could continue to trade like a risky currency, breaking its traditional safe-haven correlation with equities .
• Global growth divergence: Stronger rest-of-world growth could accelerate dollar weakness despite the delayed Fed cuts.

Broader Market Context

The DXY dollar index ended 2025 down ~9%, reflecting the tariff shock and fading exceptionalism narrative . Wall Street consensus in late 2025 was for the dollar to resume its slide in 2026 as the Fed continued easing — a view that has been partially upended by the labor market's strength . Deutsche Bank and other major banks shared similar forecasts of a weaker 2026 dollar, all of which face similar upside risk now . The broader FX environment has shifted from a dominant USD trend in 2024–2025 to a more fragmented, relative-value-driven market, where activity data and central bank divergence play a larger role .