Goldman Sachs conveyed a clear signal to the market in its 2026 global foreign exchange outlook: the hegemony of the US dollar is weakening, but it has not yet collapsed.
According to the report, on January 10, Goldman Sachs' team led by Kamakshya Trivedi released research stating that their core logic is that, although the dollar's current valuation is still overvalued by approximately 15% according to their GSDEER model, and the US's economic performance advantage relative to the rest of the world is narrowing, this does not imply an immediate collapse of the dollar.
Goldman Sachs' base case is that the dollar will undergo a "slow descent," a process driven by relatively robust global growth and more balanced asset returns. However, for investors, the most critical tail risk does not stem from traditional macroeconomic data, but from structural changes in capital markets—if the "exceptionalism" of US tech stocks faces a reassessment, such as a moment akin to a "DeepSeek 2.0" event, leading to a halt in capital inflows to US assets, the dollar could face a far more severe depreciation than expected.
Furthermore, Goldman Sachs believes foreign exchange trading opportunities in 2026 will be more evident in pro-cyclical currencies and specific emerging market currencies, rather than in simple dollar short positions.
The dollar's slow retreat and the looming threat over tech stocks form a central tension.
Goldman Sachs' core view is built on a long-term judgment that the diminishing relative advantage of the United States will ultimately lead to a weaker dollar.
Although the dollar experienced a significant decline in 2025 before stabilizing due to the resilience of the US economy, Goldman Sachs expects 2026 to see a repetition of this tug-of-war. On one hand, steady global growth and improved risk sentiment typically correlate negatively with the dollar; an adjustment is reasonable given the high valuation the dollar has accumulated over the past decade. On the other hand, Goldman Sachs economists' growth forecast for the US in 2026 is significantly higher than the market consensus, suggesting US economic performance might be sufficient to maintain a floor for the dollar's high valuation.
However, the downside risks facing the dollar extend beyond mere cyclical macroeconomic adjustments.
Goldman Sachs specifically highlights that a key factor supporting the dollar's high valuation and financing the US current account deficit in recent years has been global investors' fervent demand for US equities, particularly tech stocks. While Goldman Sachs expects productivity gains from artificial intelligence to continue, the crucial questions are whether these benefits will diffuse globally and whether the return on capital can justify the current lofty valuations of tech stocks.
If market faith in US tech "exceptionalism" wavers, even if just due to a technological iteration moment that challenges existing expectations, it could trigger a reversal in capital flows, thereby dealing a significant blow to the dollar.
The euro's return to fair value and the pound's structural challenges present a divergent picture.
Among G10 currencies, the outlook for European currencies shows significant divergence.
After a strong performance in 2025, the euro's exchange rate against the dollar is now near "fair value," or even slightly overvalued on a broad basis. Goldman Sachs believes that further upside for the euro will primarily depend on broad-based dollar weakness, rather than explosive growth within the Eurozone itself. Nonetheless, increased European fiscal spending and the diversification of global investment portfolios will still provide support for the euro, allowing it to appreciate modestly in line with a declining dollar trend.
In contrast, the outlook for the British pound appears dim. Goldman Sachs bluntly labels the pound as the "laggard" in Europe. According to the GSDEER model, the pound is the most structurally overvalued currency in the G10.
Pressure for UK fiscal consolidation and a weak domestic cyclical outlook leave the pound lacking fundamental support. More critically, Goldman Sachs predicts the Bank of England will implement more interest rate cuts in 2026 than currently priced by the market, forecasting three 25-basis-point cuts by year-end. This policy divergence is expected to cause the pound to underperform its European peers, and Goldman Sachs recommends investors short the pound in cross rates, such as by going long EUR/GBP.
The tech wave and valuation divergence are reshaping the Asian currency landscape, according to Goldman Sachs.
In Asian markets, Goldman Sachs paints a picture driven by the technology cycle and valuations.
Goldman Sachs is optimistic about low-yielding Asian currencies closely tied to the tech supply chain, such as the Korean won, Taiwanese dollar, and Malaysian ringgit, expecting them to outperform high-yielding currencies like the Indonesian rupiah and Philippine peso in 2026. The Korean won, in particular, benefits not only from AI-related investment booms but is also set to receive tens of billions in passive inflows in 2026 due to its inclusion in the FTSE World Government Bond Index (WGBI). Additionally, the restart of the National Pension Service of South Korea's (NPS) foreign exchange hedging program could lead to approximately $50 billion in USD forward selling, further supporting the won's exchange rate.
For yield-seeking emerging market investors, Goldman Sachs suggests focusing on currencies with improving fundamentals and attractive valuations.
Despite political noise, the Brazilian real and Colombian peso offer attractive carry opportunities due to their high real interest rates and undervalued exchange rates. Currencies like the South African rand, Chilean peso, and Peruvian sol are not only undervalued but, as pro-cyclical currencies, will benefit from rising global commodity prices (especially the divergence between metal and energy prices) and steady growth in the Chinese economy.
Goldman Sachs emphasizes that in the current low implied volatility environment, positioning for volatility in these currencies using instruments like options is also a cost-effective strategy, as current market pricing appears to underestimate potential macroeconomic uncertainty.
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