U.S. Dollar Weakness

Episode Summary

Executive Summary: Goldman Sachs strategist Zach Pandle argues the U.S. dollar entered 2020 very strong but has become vulnerable as the Fed cut rates to zero and the global recovery improved. He sees the euro as the main beneficiary of dollar weakness, citing cheap valuation, a stronger reopening, and reduced euro-area tail risk. U.S. election outcomes and tariffs could further shape FX moves.

Main Topics: Dollar strength entering 2020 (Priority: 5/5): The dollar began the year on strong footing due to years of U.S. outperformance, higher relative rates, strong corporate earnings, and safe-haven demand. COVID-19’s mixed impact on the dollar (Priority: 5/5): The crisis initially boosted the dollar in risk-off markets, but Fed rate cuts removed a key support, making the currency more vulnerable. Why the dollar can weaken in portfolios (Priority: 4/5): Pandle says Goldman became more comfortable recommending dollar shorts once a sustained global recovery looked credible and valuation remained stretched. The euro as the main counterweight (Priority: 5/5): Among major currencies, the euro stands out for undervaluation, better recovery prospects, and structural fiscal progress in Europe. Investor debate and pushback (Priority: 3/5): Equity investors question whether Europe can sustain earnings and equity outperformance versus the U.S., which affects confidence in euro upside. U.S. election and FX implications (Priority: 4/5): Corporate tax policy, tariffs, and broader U.S. global posture could influence the dollar, the yuan, and other China-sensitive currencies.

Key Arguments: The dollar was already expensive before COVID, after years of U.S. asset and earnings outperformance and heavy global portfolio inflows into U.S. markets. The pandemic pushed the dollar up in the initial market shock, but the Fed’s move to the zero lower bound removed one of the dollar’s key structural supports. Because the dollar is a counter-cyclical safe-haven asset, Goldman waited for evidence of a durable global recovery before recommending active dollar shorts. The euro is the most compelling major-currency alternative because it is cheap, supported by trade surplus and balance-of-payments strength, and likely to recover more smoothly than the U.S. Europe’s recovery fund and fiscal burden-sharing are meaningful structural improvements that reduce tail risk for the common currency. U.S. election outcomes could affect FX via higher corporate taxes, reduced tariffs under a Biden administration, and possible long-run de-dollarization trends under continued U.S. retrenchment. Tariff rollback would likely help the Chinese yuan and other China-sensitive currencies relative to the dollar.

Data Points: Dollar share of global foreign exchange reserves: about 60% - Used to illustrate the dollar’s unique international role and safe-haven demand. U.S. share of the global economy: about one-fifth - Compared with the dollar’s dominant role in reserves and cross-border finance. Treasury market held by overseas investors: about half - Supports the argument that Treasuries are a global safe-haven asset. Euro long-run fair value vs. dollar: around 1.30 - Goldman’s estimate for EUR/USD fair value. EUR/USD level mentioned in the discussion: around 1.12 - Used to show the euro is deeply undervalued relative to fair value. Euro overvaluation/undervaluation at dollar highs: around 20% overvalued - Refers to the dollar’s stretched valuation at the March/April peak. U.S. corporate tax bill timing: late 2017 - Dollar strengthened as the corporate tax bill moved toward passage. Podcast recording date: Tuesday, June 30, 2020 - Sets the timeframe for the market views and forecasts.

Pivotal Quotes: "we always have this sort of question about whether we want a strong dollar in the United States, but we've certainly had one in the last couple of years" — Jake Seward: Sets up the discussion of the dollar’s prior strength and policy debate. "we think it reflects the U.S. currency's unique global role" — Zach Pandle: Explains why the dollar can rise even when U.S.-specific risks increase. "there is a bull case for the Euro" — Zach Pandle: Core thesis for the main currency that could benefit from dollar weakness.

Implications: Investors should view FX through both cyclical recovery and structural policy lenses. If global growth stabilizes, the dollar could weaken further, with the euro as the main beneficiary. U.S. election policy on taxes and tariffs may create additional currency volatility.