Tariffs Could Send the Dollar Lower as U.S. Growth Slows, Goldman Sachs Warns

The trajectory of US trade policy is shaping currency markets in real time. As tensions rise and policy choices swing with speed, Goldman Sachs Research notes that the fuse is burning not only on trade but on confidence, governance perceptions, and the appeal of US assets to foreign investors. The result is a currency story where uncertainty and policy reversals complicate how investors price outcomes, and where a weaker dollar could persist against major peers into next year. The team’s analysis highlights that the dollar’s dominance in global portfolios has benefited from long-standing yield differentials and relative strength, but that dynamic is now at risk as tariff moves, political frictions, and shifting global perceptions weigh on the currency’s valuation and the outlook for US assets.

The trade-policy backdrop and the market response

US trade policy is undergoing significant recalibration, and the consequences are rippling through financial markets in ways that extend beyond traditional tariff mechanics. Goldman Sachs Research underscores that the current environment is characterized by rising trade tensions and a broader uncertainty framework that elevates risk premia across asset classes. This uncertainty is not solely about tariff levels; it also reflects changing perceptions of how the US is governed and how institutions function in practice. For foreign investors, these perceptions matter because they influence the perceived safety, predictability, and long-run profitability of US assets. When policy decisions swing between protectionist rhetoric and pragmatic compromise, investors face the challenge of pricing a wide range of potential outcomes, not just a single tariff bill or a one-off policy shock.

This environment has immediate implications for the dollar. In the first quarter of 2025, Goldman Sachs Research anticipated a continued period of USD weakness against its major peers, driven by a combination of factors including uncertain policy outcomes, shifting risk appetite, and a re-evaluation of US growth and inflation dynamics under a tariff-heavy regime. The forecast at the time suggested that the US currency could decline roughly 10% against the euro over the next 12 months, with even larger potential depreciation against the Japanese yen and the British pound, by about 9% for each as of early April. This view is rooted in a broader historical pattern: the dollar’s share of global financial portfolios expanded significantly over the past decade, propelled by attractive US asset returns and comparatively weaker yields in many other developed markets. That balance, built on the expectation of superior returns and relative safety, now faces headwinds as the policy environment becomes more uncertain and the commerce landscape shifts.

Historically, the dollar benefited from sizable capital inflows into US assets from developed economies such as the euro area, Japan, and Norway. Those inflows reinforced the dollar’s weight in global portfolios, creating a feedback loop where the currency supported higher asset prices and vice versa. The Goldman Sachs Research team now argues that this positioning is at risk of reversing as tariff-related burdens compress US corporate profit margins and real consumer incomes, potentially eroding the very advantages that have underpinned the dollar’s exceptional valuation. If tariffs weigh on corporate profitability and living standards, the exceptionalism of the dollar—its status as the premier reserve and funding currency—could be undermined, weakening the central pillar for the dollar’s strength in global markets.

The question, therefore, is not simply whether tariffs will weaken the dollar, but how the market will price policy uncertainty across a broad spectrum of scenarios. The team has long believed that the US’s high return prospects have been a key driver of the dollar’s strength. When tariffs begin to compress profits and real incomes, that exceptionalism can be challenged, potentially leading to a broader repricing of US assets and the currency’s relative appeal. The dynamics are further complicated by evolving investor expectations about risk, policy reliability, and the relative attractiveness of alternatives outside the United States. In this sense, the current policy mix—combining tariff threats with non-tariff concerns such as fiscal plans, regulatory changes, and labor-market signals—creates a more uncertain environment for pricing outcomes, especially for those assets that have benefited from the past decade’s US-centric capital flows.

The evolving role of tariffs in dollar valuation

Will tariffs ultimately translate into a weaker dollar? The Goldman Sachs Research team notes a shift in their previous view. Earlier, they anticipated that trade-related uncertainty would exert a heavier drag on foreign economies than on the United States. In practice, soft US data—despite fingers of resilience in other regions—have shown worrying signs, while European sentiment has proven more resilient than expected. This divergence is partly tied to non-tariff issues such as federal spending cuts and concerns about the strength of the US labor market. Tariff policy, however, is an integral part of the broader uncertain policy mix and contributes to a shakier US economic outlook.

There are tangible signals that tariff announcements and a tougher stance toward long-standing allies are shaping how the world views the US and US assets. For example, consumer boycotts of US goods and a decline in foreign travel to the United States—evidenced by lower foreign arrivals at major US airports in the wake of tariff announcements—are modestly suppressing GDP growth and feeding into the broader uncertainty surrounding the policy framework. Goldman Sachs Research highlights that even when foreign spending plans are stronger than expected and US asset performance lags, the net effect can include a temporary rotation out of US assets and a greater emphasis on hedging among investors who retain exposure to the United States.

Concurrently, officials around the world have taken steps to reduce their reliance on the dollar as a monetary anchor. This effort is one of several reasons why the dollar’s share of foreign exchange reserves has declined over the last decade and now sits near its lowest level since the euro was introduced. Private sector investors have, to date, largely offset reduced official demand by chasing higher returns in US assets. Cahill notes that, should broader policy disruptions persist and US exceptionalism erode further, private sector investors might follow a similar pattern in reducing concentration in US dollars and seeking diversification.

Tariffs and pass-through: how costs are borne

The mechanics of tariff pass-through are central to understanding the dollar’s potential trajectory. Goldman Sachs Research emphasizes that tariffs can be absorbed through a mix of reduced foreign margins, squeezed domestic margins, and higher consumer prices for US buyers. The relative weighting of these channels depends on numerous factors, including the negotiating leverage of domestic producers, the elasticity of supply chains, and the ability of firms to pass costs along to consumers without dampening demand. When tariffs target critical imports—those items that are hard to substitute—the pricing power of foreign suppliers may increase, leading to higher import costs that can shift the terms of trade and potentially depress the dollar.

Cahill explains that when broad unilateral tariffs are on the table, foreign producers lose incentive to accommodate tariff costs, placing more of the burden on US businesses and consumers as price-takers. The implication for the currency is that, in scenarios where supply chains and consumer demand are relatively inelastic in the short term, the dollar may need to weaken to restore balance. Conversely, if foreign markets retain pricing power and can push costs onto US importers without a proportional loss of demand, the currency may exhibit greater resilience. These dynamics illustrate why the pass-through mechanism matters as much as the tariff level itself in determining the currency’s path.

In a broader sense, a 10% across-the-board tariff regime would alter the traditional dynamic where the larger economy typically bears less of the tariff’s cost in the long run. If production costs rise broadly across borders, the relative advantage of the United States could erode, potentially reducing its terms of trade and exerting downward pressure on the dollar. It’s important to recognize, though, that this scenario is not guaranteed. It represents a plausible outcome under certain assumptions about pass-through, demand elasticity, and global supply-chain resilience. The possibility of such a shift opens new policy and investment considerations, especially when compared to the earlier period of the Trump administration, where there was greater room for US firms to source goods from outside China and perhaps avoid tariffs entirely through alternative supply chains.

Global spillovers: reserve composition, investor behavior, and dollar dynamics

Tariff policy does not operate in a vacuum. The dollar’s role as a global reserve and funding currency means that policy shifts in the United States reverberate through international balance sheets, financial markets, and cross-border asset allocations. Goldman Sachs Research underscores that there are signs of a shift away from the dollar in official reserve portfolios, a trend that has intensified as the global environment has become more complex and less predictable. The reduction in official demand for dollar reserves has not gone uncountered by private sector activity; indeed, private investors have often stepped in to maintain demand for dollar-denominated assets, attracted by relatively strong absolute returns and an extensive, liquid U.S. financial market. Yet the broader trend suggests a structural re-evaluation of the dollar’s primacy, with potential implications for the currency’s exchange rate and global funding conditions.

Cahill argues that the erosion of the dollar’s reserve share reflects a combination of policy uncertainty, geopolitical frictions, and a long-run diversification motive among central banks. If private sector investors begin following the same pattern as official sector actors—moving toward greater diversification and a broader mix of currencies in portfolios—the dollar could face persistent headwinds. This scenario would be reinforced if tariff-driven US profit margins remain under sustained pressure and if global growth dynamics shift toward more balanced or even non-US-led growth cycles.

Investor hedging, rotation, and the search for yield

The combination of tariff-induced policy uncertainty and evolving global risk preferences has contributed to notable investor behavior changes. According to Goldman Sachs Research, there have been episodes of brief but active rotation out of US assets in response to shifts in relative performance and the hedging demand for the dollar. Investors have shown renewed interest in hedging US exposures as a way to manage uncertainty about future policy directions and their impact on asset prices. This behavior reflects a broader risk-management mindset that prioritizes diversification and downside protection in an environment where the path of tariffs and other policy measures remains unclear.

At the same time, foreign governments and central banks have pursued strategies to decouple their reserves from a heavy reliance on dollars. This trend, paired with a more ambiguous US policy backdrop, helps explain why the dollar has faced structural pressures and why its share of global reserves has declined toward multi-decade lows. Cahill notes that if the broader policy disruptions persist and US exceptionalism declines, private sector investors could follow the same path, potentially accelerating the shift away from the dollar in global investment allocations and reserve holdings.

Tariffs, terms of trade, and the broader policy landscape

A core question in this analysis concerns how tariffs affect the US terms of trade and the broader macroeconomy. The channel through which tariffs influence economic outcomes is not limited to direct price increases on imported goods. Tariffs also interact with margins, consumer incomes, and the competitiveness of domestic industries in a global supply chain context. If tariffs reduce the profitability of US firms or reduce real wages for consumers, the relative appeal of US assets could diminish. In turn, the dollar’s status as the leading reserve currency and funding vehicle could be challenged by a reassessment of risk and return in exchange for a broader set of international assets that offer more favorable perceived risk-adjusted returns.

According to Goldman Sachs Research, tariffs can be paid in several ways. One path is through lower margins on foreign-produced goods, which translates into higher prices for US consumers or diminished profits for US importers, potentially dampening demand for US goods abroad. Another path is through squeezed domestic margins, as US companies absorb higher input costs or pass some costs along to consumers. A third channel is higher domestic consumer prices, which reduce real incomes and dampen consumption. The relative balance among these channels depends on the substitutability of goods, the sensitivity of demand to price changes, and the negotiating power of firms in the supply chain. In scenarios where US terms of trade deteriorates, the dollar would tend to depreciate, all else equal.

An important nuance is that the geopolitical and economic context matters. The analysis notes that unilateral tariffs create disincentives for foreign producers to offer concessions, which increases the likelihood that US businesses and consumers end up bearing more of the tariff burden. If supply chains prove relatively inelastic in the short run, the adjustment mechanism may be more painful and the dollar more susceptible to depreciation as a natural correction to restore equilibrium in trade and price relationships. That said, the outcome is not guaranteed. The global economy’s resilience, the pace of tariff implementation, and the scope of substitution opportunities all influence the ultimate currency effect.

The policy horizon and potential real-world outcomes

The latest trade tensions create a policy landscape that differs from earlier administrations’ trajectories in meaningful ways. The current environment introduces new possibilities for how US companies might adapt—such as sourcing from outside China or reconfiguring supply chains to mitigate tariff exposure. These adaptations can influence both macroeconomic variables and the exchange rate by altering the cost structure of US imports and the competitive dynamics faced by domestic producers. The possibility of renewed flexibility in sourcing and production arrangements adds a layer of complexity to the dollar’s outlook, because it affects the relative cost of US goods in international markets and the demand for US-issued assets.

At this juncture, the team emphasizes that the analysis remains contingent on how tariff policy unfolds over time, how other policy instruments (fiscal, regulatory, and monetary) evolve, and how international partner economies respond to US actions. The dynamic is inherently interactive: policy shifts drive market expectations, which feed into asset pricing and currency movements, which in turn influence investment, trade flows, and the real economy. The result is a complex, evolving picture in which the dollar’s strength is not guaranteed but remains sensitive to the interplay of tariffs, uncertainty, and global demand for US assets.

Market implications for investors and policy uncertainty

For investors, the current environment presents both risks and potential hedges. The prospect of a weaker dollar against the euro, yen, and pound alters cross-asset allocation considerations, including currency hedging strategies, international equity exposure, and the relative attractiveness of US vs. non-US fixed income. The potential for rotation out of US assets—driven by concerns about margins and real incomes—highlights the importance of diversification and risk management as core components of a global portfolio strategy. At the same time, the ongoing evolution of official reserve composition and the prospect that private sector investors might follow a broader pattern of diversification reinforces the importance of examining currency exposure and the potential for regime shifts in monetary policy.

From a policy perspective, the cross-border implications of tariff policy extend beyond the United States. As other economies adjust to the tariff landscape, exchange rates, capital flows, and trade structures may be reshaped in ways that influence global financial stability. The possibility of a dollar depreciation in response to tariff-driven terms-of-trade adjustments implies that policymakers should consider the broader macroeconomic and financial-stability implications of tariff choices, including how quickly markets can adapt to new equilibrium conditions and what this means for global growth, inflation, and financial conditions.

Private sector actors, including multinational firms and financial institutions, will need to monitor evolving risk factors closely. This includes evaluating supply-chain resilience, the cost pass-through dynamics of tariffs, and the potential for policy surprises that could disrupt pricing, financing, and investment plans. The prospect of a weaker dollar could have mixed effects: while it may support US export competitiveness and reduce some import costs for foreign buyers, it could complicate debt servicing for dollar-denominated liabilities and raise the cost of financing for US-dollar assets in foreign markets. Banks, corporations, and asset managers will need to carefully assess currency exposure, hedging effectiveness, and the sensitivity of earnings to exchange-rate movements as tariff policy evolves.

Practical guidance for practitioners

• Reassess currency hedging programs to reflect the possibility of prolonged USD softness and higher volatility in policy-driven outcomes.
• Rebalance international portfolios to reflect a broader set of currencies and consider exposure to USD-denominated assets with selective hedges in place.
• Monitor policy developments, particularly tariff announcements and non-tariff policy shifts, for early indications of shifts in risk sentiment and trade-flow dynamics.
• Evaluate supply-chain configurations and cost structures in the context of tariff environments that may persist, become more aggressive, or shift toward targeted/chronic measures.

The long-run narrative: what to watch next

Looking ahead, the trajectory of the US dollar in this tariff-driven environment will hinge on a constellation of factors, including the persistence of policy uncertainty, the effectiveness of non-tariff policy measures, and evolving international responses to US actions. The potential for a gradual re-pricing of US asset returns in light of tariff headwinds, combined with shifts in reserve composition and private-sector demand, could lead to a sustained period of USD softness versus key currencies if the market perceives a slower growth path or reduced profitability within the US economy.

The analysis also underscores an important comparison with past policy episodes. The current dynamics differ from earlier eras when US policy could more cleanly shield domestic consumers and producers from the cost of tariffs through substitution and adjustment. The newer environment features more integrated global supply chains and more pervasive cross-border linkages, which can amplify the spillovers of tariff policy, both through real economic channels and financial markets. In this context, the possibility that the US may bear a larger portion of tariff costs—particularly if foreign producers face less price pressure or if global demand weakens—introduces a path toward currency depreciation that is not merely plausible but increasingly plausible under plausible policy scenarios.

The broader takeaway is that the dollar’s fate is tightly linked to how policy uncertainty is resolved, how tariffs are implemented and adjusted over time, and how other economies adapt to a shifting US policy landscape. The next steps for investors and policymakers involve careful risk assessment, scenario planning, and disciplined execution in the face of persistent uncertainty. As demand patterns, inflation dynamics, and growth trajectories evolve, the dollar’s role in global finance will continue to adapt, reflecting both the resilience of US financial markets and the growing influence of international reactions to US trade policy.

Conclusion

The evolving US trade policy environment is reshaping currency dynamics, with Goldman Sachs Research highlighting a cautious but nuanced picture. Tariffs and policy uncertainty weigh on confidence, investor appetite for US assets, and the dollar’s traditional dominance, even as non-tariff factors and reform efforts add further complexity. The team’s forecast of a weaker dollar against major peers over the next year reflects a belief that tariff-driven margins and real-income pressures could erode the exceptionalism that has underpinned the dollar’s strength. At the same time, the interplay of policy shifts, reserve diversification, and private-sector behavior suggests that the path forward is highly contingent on how policy is executed, how global partners respond, and how supply chains adapt to a more tariff-centric world.

For markets, this means staying attuned to policy signals, maintaining diversified exposure across currencies and assets, and recognizing that the currency dynamics are a moving target shaped by dynamic negotiations, evolving demand, and structural shifts in the global economy. As the policy landscape continues to unfold, investors, corporates, and policymakers will need to navigate a terrain where the dollar’s fate remains closely tied to the balance between US policy uncertainty and global demand for US-based assets. The current moment emphasizes caution, adaptability, and a proactive approach to managing currency risk in a world where tariff policy and governance perceptions are increasingly shaping market outcomes.