Goldman Sachs has issued a note to clients warning that the US dollar's recent strength may not last, as rising trade tensions and potential Federal Reserve rate cuts could trigger a reversal. The investment bank's currency strategists highlighted that the greenback has rallied nearly 5% against a basket of major currencies since October, but this momentum faces headwinds from President Trump's tariff policies and slowing US economic data.
The warning comes as the FTSE 100 slipped 0.4% to 7,642.3 on Tuesday, with exporters such as British American Tobacco and Unilever among the biggest fallers. A stronger dollar typically hurts UK-listed multinationals that report earnings in sterling, reducing the value of their overseas profits. The mid-cap FTSE 250 also edged lower, dropping 0.2% to 19,210.1.
For UK investors, the dollar's trajectory is particularly significant given the large exposure of British pension funds to US equities. Many defined contribution schemes hold a substantial portion of assets in American stocks, meaning a weaker dollar could reduce the sterling value of those holdings. Pensions expert Tom McPhail noted that 'a sustained dollar decline would be a headwind for UK pension savers who have benefited from currency gains in recent years.'
Goldman's analysis points to three key risks: the potential for further US tariffs on European and Chinese goods, which could disrupt global trade and hurt the dollar; a Fed pivot towards rate cuts if inflation cools; and growing fiscal concerns in Washington. The bank's base case is for the dollar to trade at $1.12 against the euro by year-end, implying a modest weakening from current levels around $1.08.
Market participants are now watching for the US consumer price index release later this week, which could provide clues on the Fed's next move. A softer reading might reinforce expectations of rate cuts, further pressuring the dollar. For UK households, the knock-on effects could include cheaper imported goods but also lower returns from overseas investments.
Source: Goldman Sachs research note