USD: Goldman Sachs - Less USD Strength In Its Baseline

Goldman Sachs: "Tariff disbelief, rate relief, and a changing brief. The Dollar fell despite new tariffs being implemented. We attribute this chiefly to two factors—disbelief and rate relief. More specifically, the market never ascribed a high probability to new tariffs on Canada and Mexico being enacted with any durability, though CAD has started to underperform as reciprocal tariffs are reportedly imminent. Instead, the market has treated this as another source of uncertainty that might weigh on US activity given signs of a slowdown in some consumer and labor market data. As we have previously discussed, the Dollar's safe-haven attributes are only activated when there is no room to price Fed cuts or the recession fears are more global, which is not the dynamic now. We still believe that more durable tariff implementations and the economic disparity they would cause will support the Dollar over the course of the year. However, we acknowledge that the risks have risen in two important aspects of the currency outlook remit. First, tariff threats so far have been less credible and directed in places that are less impactful for the currency—critical imports where the adjustment falls more on prices than FX, and China which has so far kept its currency stable—perhaps a sign of confidence in its export pricing power and competitiveness. 

Second, the European policy response has clearly been stronger than expected, which shifts the potential balance between the tariffs that are Dollar-positive, and foreign fiscal spending which should create more attractive investment opportunities elsewhere and weaken the Dollar. On our outlook, despite weaker implementation so far, we think the risks of more global tariffs have gone up not down—in fact our economists just added broader tariffs to the baseline and revised down US growth to now slightly below potential in 2025. And on the foreign response, we are reminded of the discussion around the NGEU funds where there was initial optimism followed by serial disappointments on implementation and activity outcomes, which would be consistent with our economists' expectations for a low multiplier on and slow deployment of military spending. The Dollar has already weakened substantially this week so these are considerations for thinking carefully about tactical positioning. But the combination of potentially a more balanced global growth and asset return picture and more muted response to tariffs is likely to prove the more lasting shift and risks have moved further in the direction of less Dollar strength in our baseline."