Synopsis:

Goldman Sachs maintains that the US dollar's primary trend is upward, driven by robust nominal GDP growth, attractive yields, and strong capital flows. However, excessive dollar strength could challenge global liquidity and emerging markets.

Key Points:

1. Drivers of USD Strength:

   • Superior US nominal GDP growth, carry, assets, and capital inflows underpin the dollar’s strength.
   • The US remains uniquely positioned among major economies to attract investment and sustain economic resilience.

2. Risks of Excessive Strength:

   • A sharper or higher peak in the dollar could pressure emerging market economies, particularly those with limited resources, through tighter credit conditions and higher inflation.
   • While EM Asia has sufficient reserves and the capacity to slow currency depreciation, weaker regions are more vulnerable.

3. Trigger Points for Concern:

   • A 10% drop in EUR/USD could signal problematic levels of dollar strength, aligning with Goldman’s estimates of the dollar’s response to a broader trade conflict.

4. The Source of Strength Matters:

   • The impact of dollar strength depends on its drivers, whether superior US economic fundamentals or external shocks, such as an escalation in trade tensions.

Conclusion:

Goldman Sachs expects the dollar to strengthen further in 2025, supported by US economic advantages. However, policymakers and markets should monitor potential liquidity challenges and EM vulnerabilities if the dollar gains too rapidly or extensively.