Goldman Sachs: Three major obstacles suppressing the dollar's ability to regain its "safe-haven" status
Goldman Sachs found that this year, when U.S. stocks decline, the probability of the dollar depreciating is more than twice that of the past decade, completely breaking the old rule of "the more panic, the more you buy dollars." There are three key reasons behind this: the uncertainty of U.S. policies makes foreign capital uneasy, global funds prefer diversified investments, and the shadow of fiscal risk lingers. The bank believes that the dollar's weak cycle may continue and will continue to manifest as a "risk" currency
The traditional safe-haven status of the US dollar has faced significant challenges this year, making it difficult for the title of "safe haven" to return.
According to news from the Chase Trading Desk, Goldman Sachs' latest report shows that the dollar is experiencing one of the most significant periods of weakening safe-haven properties in decades—this year, when US stocks fell, the probability of the dollar depreciating simultaneously has surged more than twofold compared to the past decade, forcing global investors to restructure their foreign exchange hedging strategies. Three major factors—policy uncertainty, narrowing US return advantages, and a shift in capital flows—are forming a sustained pressure on the dollar.
Goldman Sachs strategists Karen Reichgott Fishman and Lexi Kanter wrote in their research report, although the correlation between the dollar and risk assets has shown signs of normalization recently, analysts believe the dollar may continue to behave as a "riskier" currency. The investment bank recommends that foreign investors increase foreign exchange hedging, while US investors should reduce hedging against defensive currencies such as the yen, Swiss franc, and euro to cope with this structural change.
Weakening Safe-Haven Properties Become the New Normal
This year, the dollar has frequently depreciated during US stock pullbacks.
Goldman Sachs data shows that in the 27 weeks leading up to early July, the occurrence of simultaneous declines in stocks and the dollar was more than twice the average from 2014 to 2024. During the week when US stocks fell, the probability of the dollar also declining jumped from the historical average of 16% to 33%.
More seriously, the simultaneous decline of stocks, US Treasury bonds, and the dollar has also become more frequent than before, which is seen as a key signal of the overall decline in the attractiveness of US assets. Goldman Sachs strategists Karen Reichgott Fishman and Lexi Kanter pointed out in the report that this pattern reflects the weakening of the US asset's "safe haven" status.
Three Major Resistances Constrain Dollar Recovery
Goldman Sachs analysis believes that the main reason the dollar struggles to quickly regain its traditional safe-haven properties is due to persistently high policy uncertainty. Issues ranging from tariff policies to the independence of the Federal Reserve are variable, and investors need to see a more predictable and friendly policy environment before they will rely on historically established correlation relationships again. Erratic policies will only deter investors.
In addition, the trend of capital diversification has strengthened, and the weakened advantage of US return prospects has reinforced the rationale for portfolio diversification. Previous research by Goldman Sachs showed that capital flows played a larger role in the poor performance of the dollar, and greater marginal demand for non-dollar markets should allow foreign exchange to continue deviating from cyclical fundamentals, even if the outlook for US stocks appears more positive.
At the same time, fiscal concerns may resurface, as seen briefly at the end of May. However, if debt issues reappear, this could reactivate the negative feedback loop of "spread widening - dollar depreciation," exacerbating concerns about capital repatriation and US Treasury bond sell-offs.
Adjustment of Foreign Exchange Hedging Strategies is Imperative
Goldman Sachs' quantitative analysis reveals significant changes in the effectiveness of foreign exchange hedging strategies. According to the report, in the past six months, foreign investors holding hedged US stocks have seen significantly higher average returns compared to those without hedging strategies, contrasting sharply with recent years Analysis shows that European investors have gained the most from hedging strategies, and even Canadian investors can see better results. From a risk perspective, foreign exchange has become a greater contributing factor to the variance of multi-asset portfolios, further supporting the rationale for hedging strategies.
However, Goldman Sachs also pointed out that hedging costs have been a limiting factor for some investors. But the Federal Reserve's potential rate cuts may encourage investors in regions with lower domestic interest rates, such as Japan, to make more significant adjustments.
The Cycle of Dollar Depreciation May Continue
Although Goldman Sachs does not believe that the safe-haven appeal of the dollar will undergo a permanent change, the current environment resembles a mild depreciation similar to that of 2017, rather than a historical crash.
However, the increasing pathways to dollar weakness and the rising probability of returning to atypical correlations tilt the risks toward a more significant and prolonged depreciation than currently expected.
If a cycle of "capital flight → dollar decline → more people fleeing" forms, the extent and duration of depreciation may far exceed expectations. Just like a supermarket sale triggering a rush to buy, a weaker dollar itself will attract more selling.
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