Chief economist at Goldman Sachs: A weaker dollar can basically help the USA
However, I humbly believe that the last depreciation of the dollar by five percent. In terms of wide, weighted trade, it will be much deeper.
Federal reserve data shows that the real value of the dollar still has almost two standard deviations above the average from the beginning of the era of a liquid exchange rate in 1973. The only two historical periods with a similar valuation level are half of the 1980s and the beginning of the 21st century. Both created conditions for depreciation by 25-30 percent.
In combination with the ongoing flow of investment portfolios to American assets and better results of this country, the dollar appreciation significantly increased the share of the United States in the portfolios of global investors. IMF [Międzynardowy Fundusz Walutowy] estimates that investors from outside the United States currently have American assets worth $ 22 trillion. [82 bln 584 mld 876 mln zł]. This is probably one -third of their total wallets, and half of this amount is actions that are often not secured. The decision of investors from outside the United States to reduce the exposure to American assets would almost certainly cause significant depreciation of the dollar.
In fact, even the reluctance of investors from outside the United States to increase their American portfolios will probably have a negative impact on the dollar. This is due to the fact that the balance of payment indicates that the US current account deficit in the amount of $ 1.1 trillion. [4 bln 128 mld 741 mln zł] It must be financed through the influx of net capital of $ 1.1 trillion. annually. Theoretically, this could take place through the purchase of American portfolio assets by foreign investors, direct foreign investment in the United States or the sale of foreign assets by the United States. In practice, however, the majority of fluctuations in the current account balance of the United States correspond to the fluctuations of purchasing American portfolio assets by foreign investors. If investors from outside the United States do not want to buy more American assets at current prices, these prices must fall, the dollar must weaken or (which is most likely) there must be both.
These observations would not matter if the American economy was still to achieve better results than the economies of other countries, as it was the case for most of the last two decades. However, this seems unlikely, at least in the next few years. At Goldman Sachs, we have recently reduced economic growth forecasts for all main economies in connection with a customs shock, but we have not lowered them as much as for the United States. We reduced our estimates regarding GDP growth in the United States from one percent. In the fourth quarter of 2024 to 0.5 percent in the same period of this year. Considering the slow growth of GDP and enterprise profits, a rapid increase in uncertainty about the US policy and doubts about the independence of the FED [banku centralnego USA]we expect investors from outside the United States to limit interest in American assets.
Dollar depreciation should not be confused with the loss of dollar status as the dominant world currency. Unless there is extreme shocks, we believe that the advantage of the dollar as a global means of exchange and means of storage of value is too strong for other currencies to outdo it. In the past, we were dealing with large fluctuations in exchange rates that did not cause the loss of the dominant position of the dollar, and our basic assumption is that the current situation will not differ from the previous ones.
What are the economic consequences of weakening the dollar? First of all, it will deepen the pressure on the increase in consumer prices related to the duties. The duties themselves will probably cause an increase in base inflation – measured by the price of consumer expenditure prices – from the current 2.75 percent. up to 3.5 percent Later in the year, and the weakening of the dollar can add another 0.25 percentage point. Although this is a slight increase, the dollar depreciation confirms our belief that the “burden” of higher American duties will fall mainly on American consumers, not on foreign producers.
Secondly, the weaker dollar not only raises import and consumer prices, but also reduces export prices (measured in a foreign currency). In a medium -term perspective, this relative change in prices should help reduce the United States trade deficit, which is one of the goals of Trump's administration. Therefore, American political decision-makers are unlikely to interfere with the depreciation of the dollar, even without any “agreement with MAR-A-Lago”.
Thirdly, a weaker dollar could basically alleviate the financial conditions and help maintain the American economy away from recession. However, the factors causing depreciation are important. Reduced demand for American assets, including tax papers, could balance the impact of a weaker currency on financial conditions.
In any case, the most important factor determining whether the United States will enter the recession is not a dollar. The decision to introduce additional “mutual” duties after the current 90-day break, the ongoing trade war between the United States and China or aggressive further customs duties on specific goods can make the recession inevitable, regardless of how the dollar exchange rate will form.
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