Synopsis:

Goldman Sachs argues the recent USD weakness reflects a structural "reset" in investor capital allocation rather than a terminal decline. Despite near-term upside risks from geopolitics and positioning, the longer-term path for the Dollar points lower.

Key Points:

• Structural Shift:
  The Dollar’s 8 percentage point underperformance vs. EUR/USD relative to cyclicals reflects a capital reallocation, not just macro data divergence.

• FX Hedging Impact:
  Shifting capital flows are also changing FX hedging ratios, reinforcing Dollar weakness as global investors adjust exposures.

• Short-Term Risks Favor USD:
  Geopolitical tensions and bearish USD positioning could temporarily support the Dollar as safe-haven demand resurfaces.

• Long-Term Dollar Risk:
  The main challenge to the bearish view is if US asset returns remain compelling enough to attract global capital despite relative value concerns.

Conclusion:

Goldman sees the USD in a reset phase, not collapse. Long-term weakness is driven by global capital rotation away from the US, but geopolitical shocks and safe-haven flows still pose short-term upside risks. The broader trend, however, remains USD-bearish.