Synopsis:

Goldman Sachs highlights global portfolio reallocation away from US assets as a key driver of USD depreciation in 2025. While not expecting a disruptive selloff, they argue the dollar will weaken as marginal demand softens, with asset prices adjusting to reflect shifting preferences.

Key Points:

• No mass exodus, but softer demand: GS sees the USD weakening more due to a lack of new demand rather than active repatriation or liquidation of US assets.

• Repricing over flows: Much of the reallocation will occur via relative price adjustments (e.g., higher valuations abroad, weaker dollar) rather than large-volume transactions.

• Empirical link remains solid: A 1% inflow into a currency's assets correlates with a 0.3% appreciation versus USD, even after accounting for interest rates and commodities.

• Caution on feedback loops: Flows and FX returns are mutually reinforcing, making it hard to untangle causality – bullish flows can strengthen FX, which then encourages more inflows.

Conclusion:

Goldman sees the USD facing structural depreciation pressure this year from weaker global demand for US assets, not panic selling. This nuanced flow dynamic underpins their bearish USD outlook, with fund flow shifts serving as both a signal and amplifier of broader sentiment change.