Goldman Sachs: The ‘Exceptional’ Positioning Behind The Dollar’s High Valuation

Goldman Sachs note that the “USD has been overvalued for almost a decade. Portfolio flows chasing ‘US exceptionalism’ and escaping more challenging risk-adjusted returns abroad provide the structural support to the Dollar’s high valuation.”

• “These flows have mostly come from developed market economies such as the Euro area, Japan and Norway, where a combination of credit risk, unattractive yields and Dollar asset outperformance has driven a substantial shift higher in the Dollar share of global portfolios.”
• “We do not view the Dollar’s valuation as a sign that it ‘must’ go down. Valuation is not a catalyst. Instead, we see it as a sign that the end of the Dollar’s run will require better capital returns abroad—likely involving a clear end to some of the problems that have plagued foreign investments in the post-GFC era.”
• “Our economic and market views suggest that Dollar assets will provide a hard bar to beat for some time to come, which is another reason why we are ‘sticking with shallow’ Dollar downside, despite what could be the end of the Fed hiking cycle. This cycle is different, in more ways than one.”