Goldman Sachs interprets the logic behind the sharp decline of the US dollar: similar to "Brexit," foreign capital is selling US stocks, not US bonds

Over the past decade, the excellent asset returns in the United States have attracted a flood of global capital, with European, Japanese, and Asian sovereign funds, as well as money from oil-rich Middle Eastern countries, continuously increasing their investments in U.S. stocks and bonds. As funds continue to flow in, the dollar has also risen accordingly, and now this "American exceptionalism" has come to an end.

Goldman Sachs' head of hedge fund business, Tony Pasquariello, recently released a report indicating that the dollar is currently overvalued by 20%, a result of American exceptionalism. Tariffs are undermining the core pillars of a strong dollar, and this time it is a confrontation between the U.S. and the world, making it more akin to "Brexit" rather than the first trade war.

Additionally, Goldman Sachs pointed out that so far, it is mainly Eurozone investors who are selling U.S. stocks, while foreign investors have not engaged in large-scale net selling of U.S. Treasury bonds.

Tariffs Hit the Core Logic of the Dollar

Goldman Sachs identified three major logics that could lead to a significant weakening of the dollar:

1. Valuation Bubble: The current dollar valuation deviates from fundamentals, with an overvaluation of 20%.

2. Impact on Profits and Consumption: The results of Trump's tariffs are not just price increases; more fundamentally, they are harming the profits of American companies and the consumption capacity of American households, both of which are the engines of "American exceptionalism." In other words, tariffs are shaking the core pillars that support a strong dollar.

3. Structural Capital Outflow: This situation is different from the tariff frictions of 2018; it resembles a "U.S. version of Brexit." In 2018, the U.S. targeted specific countries, but now it is confronting the entire world, sparing even allies, with the EU, Japan, Canada, and South Korea all being affected. This is not tactical friction but structural decoupling.

Goldman Sachs also mentioned a key risk in the report. Currently, there are $2.2 trillion in dollar-denominated assets globally that are not hedged against foreign exchange risk. If investors decide to withdraw, the impact could be significant. For example, from January 2017 to the end of January 2018, some funds flowed out of dollar assets and into assets in the Eurozone and other regions, resulting in a 20% increase in the euro against the dollar, directly widening the gap between interest rates and exchange rates.

Foreign Investors Sell U.S. Stocks, Not Bonds

Goldman Sachs believes that the starting point of this round of adjustments is that the proportion of U.S. assets in global investment portfolios is at a historical high.

However, Goldman Sachs emphasizes that the current actions of foreign investors are not a dramatic sell-off of dollar assets but are driven by a shift in marginal demand. For example, while Eurozone investors have begun to sell U.S. stocks, "other countries and regions" are still continuously buying U.S. assets. At the same time, investors are more cautious about U.S. Treasury bonds and have not engaged in a wholesale sell-off of them. Although they have reduced some long-term Treasury holdings, most of this capital has shifted to short-term U.S. bonds, with the risk-averse effect still in play.

Additionally, due to the global lack of more attractive alternative assets, some funds will not directly sell U.S. assets but will adjust by hedging foreign exchange risks, meaning they will sell dollars while retaining the underlying assets. Goldman Sachs emphasizes that the overweight positions in these dollar assets are the result of years of accumulation, and adjustments will also take time.