The global economy is navigating a complex weather pattern: interest rates edging lower in many regions, while growth remains surprisingly resilient across a wide array of markets. In this environment, the U.S. dollar tends to lose some of its upward momentum, though the process is not uniform or linear. Goldman Sachs Research’s Kamakshya Trivedi offers a framework for understanding why the dollar’s decline is expected to unfold gradually and with uneven steps, rather than as a smooth, straight path. The following analysis distills his reasoning into a comprehensive, multi-faceted picture that captures macro dynamics, market mechanisms, and the practical implications for investors and policymakers alike.
The macro backdrop: falling rates, resilient global growth
Across much of the developed and emerging world, monetary authorities have shifted toward looser financial conditions as inflation cools and growth remains stubbornly robust in many regions. This backdrop, characterized by a tilt toward lower monetary-stimulus impulse and persistently resilient economic activity, creates a fertile ground for a gradual depreciation in the U.S. dollar relative to multiple benchmarks. The reasoning rests on a few core ideas that repeatedly interact over time:
-
When global growth proves durable, capital seeks higher-yielding or more productive opportunities beyond the United States, reducing the relative appeal of dollar-denominated assets. This tendency is amplified when other major economies display stronger growth momentum or more anticipated policy ease than the U.S., narrowing the interest rate gaps that often drive currency movements.
-
Lower or expected lower interest rates in major economies reduce the carry advantage of holding dollars. Investors who previously financed foreign exposures with dollar borrowing can reallocate to other currencies or assets that offer relatively more attractive risk-adjusted returns, dampening demand for the greenback.
-
Commodity markets and real-economy cycles also play a role. As global activity holds steady or accelerates in certain sectors, commodity prices may move in ways that influence commodity-linked currencies and broader risk sentiment, feeding back into the dollar’s relative strength or weakness.
In such an environment, the dollar’s decline is less a single sudden slide and more a gradual re-pricing of relative values, influenced by the evolving balance of monetary policy expectations, growth trajectories, and global risk appetites. This nuanced process implies that the dollar can drift lower in a series of uneven steps, with noticeable pauses and occasional spikes driven by changing expectations or shifting risk sentiment. The overarching expectation is for a protracted but uneven softening, rather than a rapid, monotone descent.
To frame this more concretely, consider the interplay of several pivotal forces:
-
Interest rate differentials and policy paths: The relative pace at which the U.S. and other large economies adjust policy significantly shapes currency trajectories. If the U.S. maintains higher-for-longer policy relative to peers or experiences stickier inflation, the dollar may retain strength longer. Conversely, if other regions embark on a more accommodative stance or if U.S. inflation trends cool more slowly, the differential narrows, supporting a weaker dollar over time.
-
Growth resilience and divergence: Global growth that proves unexpectedly resilient in regions outside the U.S. can attract capital away from dollar-denominated assets, contributing to a gradual depreciation of the dollar. The degree of this shift depends on the breadth and durability of the growth impulse, not merely its presence in a single market.
-
Global risk appetite and funding dynamics: The dollar often behaves as a funding currency in a world of cross-border capital flows. If investors seek risk assets or diversify away from dollar funding, the demand for dollars can wane, reinforcing a drift lower in the currency. Conversely, increased risk aversion or the need for liquidity can bolster dollar strength temporarily, creating the “bumpy” aspects of the path.
-
External demand for U.S. assets: The attractiveness of U.S. equities, corporate credit, and other dollar-denominated instruments relative to foreign options influences currency flows. If foreign investors grow more confident in U.S. fundamentals even as rate expectations soften, the dollar’s decline can be tempered; if not, the move can gather steam.
This section lays the groundwork for a more granular exploration of how the dollar’s path might unfold in practice, given the likely persistence of a malleable global growth environment and a shifting policy landscape across major economies. The core takeaway is that a gradual, sometimes uneven downshift in the dollar is a plausible central scenario when rates trend lower and growth proves resilient worldwide.
The dollar’s path: why the decline is likely to be slow and uneven
A primary reason the dollar’s decline is expected to unfold slowly is that multiple countervailing forces can offset one another at different times, producing a non-linear trajectory. The key drivers shaping this path include:
-
The pace and horizon of monetary policy normalization or easing outside the United States: Even as many central banks commit to looser policy relative to prior tightening cycles, the timing of actual rate cuts and the degree of expected easing matter. If foreign authorities begin cutting more aggressively or anticipated future cuts become more deeply priced in, the dollar can weaken gradually. However, if U.S. policy remains comparatively restrictive for longer, the dollar can retain a firmer footing despite favorable global growth, leading to slower or more punctuated declines.
-
Inflation dynamics and real yields: Real yields influence currency values beyond nominal rate levels. When inflation cools, real yields in the U.S. can compress relative to other regions if inflation proves stickier abroad or if price pressures reaccelerate locally. The resulting fluctuations can cause periods of strength or weakness in the dollar that do not align with a simple downward trend.
-
Global risk sentiment and liquidity conditions: In periods of calm, investors may migrate toward asset classes that benefit from a lower-for-longer environment, aiding a gradual dollar decline. In times of stress, the dollar’s role as a liquidity and safe-haven asset can reassert itself, producing abrupt pullbacks in the dollar’s softness.
-
Trade balances and current accounts: Changes in trade dynamics influence currency valuations over longer horizons. A persistent current-account deficit or shifts in export competitiveness can exert pressure on the dollar, while improving external balances or stronger foreign demand for U.S. assets can offset that pressure.
-
Structural shifts in the global financial system: The evolving composition of reserve currencies, the prominence of dollar-denominated financing, and the emergence of alternative funding pathways can affect how quickly demand for dollars fades. Even subtle structural changes can create pockets of volatility within an otherwise gradual trend.
A practical way to think about the “slow and uneven” nature of the decline is to map out a series of hypothetical states the market could inhabit over the coming quarters:
-
A phase of gradual, data-dependent softening: As data surprises tilt toward softer U.S. inflation readings and global growth holds firm, markets begin to price in a less hawkish U.S. stance, gradually reducing the dollar’s yield advantage.
-
A mid-cycle pause or rebound: If market participants receive supportive signals from either inflation cooling or stronger-than-expected global activity, the dollar may experience a temporary bounce as risk-on sentiment improves, before resuming the downward drift.
-
A period of renewed dollar resilience: Should geopolitical tensions flare, or if U.S. growth unexpectedly outperforms while peers stumble, the dollar could regain ground even within a longer-term downtrend.
-
A longer-term re-pricing that reflects broad-based global normalization: Over an extended horizon, the dollar could settle at lower but not dramatically weakened levels, with periodic volatility tied to policy expectations and macro surprises.
Each of these states embodies the central idea that the decline, if it occurs, is not a straight line but a sequence of movements shaped by evolving policy signals, data outcomes, and risk dynamics. The nuanced picture requires patience and a willingness to anticipate shifts rather than assume a single, predictable direction.
Global growth, policy heterogeneity, and currency implications
One of the core challenges in forecasting the dollar’s path is accounting for heterogeneity in growth and policy across the major economies. The global economy does not move in lockstep, and the interplay between divergent trajectories and policy responses creates a complex currency mosaic. Several themes emerge when examining these dynamics:
-
Policy divergence among major economies: While some regions pursue softer monetary stances, others may maintain tighter policy or face different inflation dynamics. This divergence can create pockets of relative currency strength and weakness, influencing intra- and cross-market flows. The result is a currency landscape where the USD does not move in a single direction against all peers.
-
Growth resilience in non-U.S. markets: If growth proves sturdier in Europe, Asia, or other regions, capital can gravitate toward those opportunities, supporting a weaker dollar over time. The extent of this effect depends on how sustainable those growth impulses prove to be and whether they translate into durable outperformance of domestic assets and currencies.
-
Global demand for U.S. assets versus alternative destinations: The attractiveness of U.S. equities, corporate bonds, and other dollar-denominated instruments relative to foreign assets influences demand for dollars. A broad-based rally in U.S. assets might counteract some downward pressure on the dollar, depending on liquidity and risk considerations.
-
Financial conditions and credit cycles: The ease or tightness of financial conditions worldwide affects the relative appeal of dollar funding versus other currencies. A more accommodative global credit environment can encourage flows out of the dollar, while tighter conditions in major economies can sustain dollar strength longer than expected.
-
Structural shifts in the currency ecosystem: Innovations in foreign exchange markets, changes in the prevalence of hedging and asset management strategies, and evolving regulatory frameworks can alter the speed and manner in which these forces are transmitted to exchange rates.
From an investment standpoint, these heterogeneities imply that currency exposures should be managed with flexibility and a framework that accommodates multiple possible paths. A purely directional bet on the dollar’s decline may be less effective than a strategy that emphasizes diversification, risk management, and sensitivity to policy surprises. In practice, this might involve balanced exposure to currencies that show relative strength as policy expectations shift, alongside hedging strategies designed to protect against abrupt shifts in risk sentiment or liquidity stress.
Market channels: how the macro picture translates into prices
The translation of broad macro themes into specific market prices occurs through several channels that interact in sometimes counterintuitive ways. A deeper look at these channels helps explain why the dollar’s decline might be gradual and uneven:
-
Yield dynamics and currency carry: The relative attractiveness of holding dollar-denominated assets versus foreign assets is driven by yield comparisons and carry trades. When global yields compress but do so at different paces, capital flows reprice currencies gradually, favoring assets in regions where yields remain comparatively attractive or where expected future path of rates implies more favorable conditions.
-
Risk appetite and liquidity: In periods of higher risk tolerance, investors expand their portfolios into riskier assets, often accompanied by a reduction in the demand for safe-haven currencies like the dollar. Conversely, during risk-off episodes, the dollar can rally as a liquidity haven, creating volatility in the imagined downward trajectory.
-
Trade and current-account dynamics: Persistent imbalances between export and import flows can influence currency values. While these dynamics evolve slowly, their cumulative effect over time helps determine the baseline level of the dollar relative to other currencies.
-
Monetary policy expectations: Financial markets are forward-looking, reacting not only to current policy but to anticipated policy paths. Shifts in expectations—whether a central bank signals earlier or more aggressive easing or tightens more than anticipated—can cause sudden repricing in foreign exchange markets that appears as a bump along the longer-term downward trend.
-
Inflation expectations and real returns: Inflation trajectories influence real return expectations across currencies. If inflation in the U.S. cools more swiftly than in other economies, real yields may decline more quickly, supporting a weaker dollar. Conversely, if U.S. inflation proves sticky while overseas inflation trends eclipse it, the dollar may temporarily resist a decline.
Understanding these channels clarifies why the dollar’s path is not a straight line but a mosaic of movements tied to policy, data surprises, and the evolving mood of global investors. A disciplined approach to interpreting currency moves involves monitoring a broad set of indicators, including inflation prints, growth revisions, policy communications, and cross-asset correlations, to appreciate how the macro story is likely to be reflected in prices over time.
Implications for investors and markets
For investors, the prospect of a slow, uneven dollar decline carries several practical implications across asset classes and portfolio construction:
-
Currency hedging discipline: Given the potential for episodic volatility, strategic hedging can help manage currency risk in international allocations. A balanced approach—hedging partial exposures or using options to capture optionality—may be advantageous in the face of uncertain timing.
-
Diversified exposures: A diversified global portfolio helps mitigate risks associated with a single-currency outcome. Allocations across regions, sectors, and currencies can benefit from a nuanced understanding of relative value and growth dynamics, reducing the reliance on a single macro narrative.
-
Asset allocation relative to policy paths: Tactical adjustments to duration, credit risk, and equity exposures can be informed by evolving expectations for policy normalization and growth resilience. If rate-cut expectations firm up globally, a tilt toward higher-duration or more sensitive assets may be warranted, while a more uncertain policy horizon could favor capital preservation and selective risk-taking.
-
Risk management and liquidity: In a world of gradual shifts, preserving liquidity and maintaining risk budgets that can absorb shocks is essential. The potential for abrupt shifts—even within a broader downtrend—necessitates preparedness for fast-moving scenarios and stress-testing portfolios against multiple macro paths.
-
Market interpretation and timing: The pace of the dollar’s decline will depend on a constellation of evolving signals. Investors should focus on the coherence of incoming data with the central macro theme, rather than chasing a precise timing of turning points. Patience and disciplined monitoring of policy signals will be key to capitalizing on gradual shifts.
These implications underscore the importance of a framework that integrates macro analysis with risk management discipline. The expected path—one of gradual, uneven adjustment—calls for a balance between opportunistic positioning where fundamentals align and prudent hedging to guard against surprises that can arise from policy surprises, geopolitical developments, or sudden shifts in risk appetite.
Risks to the forecast and alternative scenarios
No forecast is without risk, and several plausible developments could alter the trajectory described above. Several noteworthy scenarios include:
-
A sharper-than-expected U.S. inflation reacceleration: If inflation proves more persistent in the United States than anticipated, the dollar could strengthen or stabilize at higher levels for longer, delaying or dampening the expected decline.
-
Faster global disinflation or growth surprises abroad: If other economies continue to surprise on the upside with more robust growth or softer inflation than anticipated, the dollar could weaken more rapidly than the base case suggests, accelerating the path toward a weaker currency.
-
Geopolitical shocks or trade disruptions: Sudden geopolitical events or amplified trade tensions could prompt a flight to safety, increasing dollar demand in the short term and complicating the overall trend.
-
Financial market stress or liquidity constraints: Episodes of market stress that raise the demand for dollar liquidity can create temporary spikes in the currency, interrupting a gradual trend and requiring observers to reassess the pace and durability of any downward movement.
-
Structural shifts in reserve currency dynamics: If the global financial system undergoes fundamental changes in reserve holdings or funding structures, the long-run relationship between rates, growth, and the dollar could be redefined, introducing new paths for currency movements that deviate from prior expectations.
Considering these risks is essential for any investor or policymaker trying to navigate the environment. A robust approach acknowledges that multiple outcomes are plausible and that the most likely path is a combination of gradual changes punctuated by episodic shifts, rather than a single, predictable glide path.
Scenarios and strategic takeaways for different market participants
Given the range of potential outcomes, different market participants may adopt tailored strategies aligned with their risk tolerance, time horizon, and asset preferences:
-
Long-term investors seeking growth through global exposure: Focus on disciplined diversification, maintain exposure to high-quality foreign assets with favorable demographics, and incorporate currency-aware risk controls to manage exposure to potential down moves in the dollar.
-
Portfolio managers with hedging capacity: Use selective hedging to protect core foreign exposures, deploy options strategies to capture upside potential during favorable policy shifts, and remain nimble to adjust hedges as data surprises arise.
-
Tactical traders with a focus on currencies and rates: Monitor shifts in policy expectations and inflation signals closely, looking for mispricings between rate paths and currency valuations. Be prepared for rapid adjustments during data surprises or geopolitical events.
-
Policy makers and central banks: Consider the broader implications of inflation trajectories, growth resilience, and exchange-rate dynamics for monetary policy calibration. Understand that currency movements can reflect, and influence, financial stability and growth outcomes.
-
Corporates with international operations: Plan for a range of exchange-rate scenarios, investing in hedging programs that align with cash-flow profiles and long-term strategic goals, while recognizing the potential for uneven currency moves to impact competitiveness and profitability.
The strategic takeaway across market participants is clear: embrace a balanced, data-driven approach that accommodates a range of possible paths for the dollar, rather than betting on a single forecast. In an environment of falling rates and resilient global growth, the most constructive posture combines prudent risk management with selective positioning that reflects evolving policy expectations and growth dynamics.
Practical considerations for policymakers and observers
For policymakers and observers, the anticipated slow and uneven dollar decline has several practical implications:
-
Communication and transparency: Clarity around policy intentions helps anchor inflation and growth expectations, reducing abrupt market re-pricing that can accompany policy surprises. Transparent signaling supports more orderly currency movements and reduces the risk of destabilizing volatility.
-
Monitoring cross-border spillovers: The interaction between domestic policy decisions and global currency movements can affect external balances, capital flows, and financial stability. Vigilant monitoring allows for timely responses to emerging vulnerabilities.
-
Coordination versus autonomy: While policy autonomy is essential for national interests, recognizing interconnections across major economies can inform more constructive coordination, particularly in mitigating adverse currency volatility and promoting stable global financial conditions.
-
Risk-focused macro thinking: Adopting a framework that emphasizes risk identification, scenario analysis, and contingency planning can help policymakers anticipate and mitigate adverse outcomes that arise from unexpected shifts in currency dynamics or growth trajectories.
-
Public communication: Clear, measured messaging about the economic outlook, policy stance, and potential scenarios can help market participants interpret developments more accurately, reducing noise and fostering confidence in the policy framework.
These considerations underscore that currency dynamics are not merely a financial phenomenon but an interplay between macroeconomic fundamentals, policy choices, and global coordination. A thoughtful, proactive approach can help stabilize expectations and support steadier progress toward macroeconomic objectives, even as the dollar navigates a gradual, uneven path in a world of falling rates and resilient growth.
Conclusion
The U.S. dollar is poised to trend lower in a setting defined by declining rates and persistent global growth, but the path will be inherently gradual and uneven. The framework laid out by Kamakshya Trivedi of Goldman Sachs Research emphasizes a nuanced interaction of policy expectations, inflation dynamics, and cross-border capital flows that collectively shape currency movements over time. Rather than a straightforward decline, the dollar’s trajectory is expected to unfold as a series of steps—some modest, some more pronounced—driven by evolving macro signals and shifting risk sentiment. For investors and policymakers alike, the takeaway is to prepare for a dynamic environment where diversification, hedging, and disciplined scenario analysis are essential tools. By anchoring decisions in a robust understanding of global growth, rate expectations, and the intricacies of currency flows, market participants can position themselves to navigate the gradual drift in the dollar while remaining resilient to the inevitable twists and turns of an ever-changing international financial landscape.
