The U.S. dollar's resilience in July has caught market attention, but Goldman Sachs believes the greenback may be on borrowed time. The investment bank points to tactical strength in U.S. assets and renewed dollar buying as temporary, cautioning that growing global diversification, fiscal policy risks, and political developments could reverse recent gains.
The U.S. Dollar Index (DXY) has rebounded 1.7% this month, recovering some ground after a sharp 12% drop in the first half of 2025. Goldman’s strategists, led by Kamakshya Trivedi, argue that this tactical bounce is not sustainable and may falter as investors refocus on long-term structural risks, including:
Elevated policy uncertainty around trade tariffs and the Federal Reserve’s leadership direction.
Shifting capital flows as global equity and bond markets normalize.
Weakening inflation support, with tariff pass-through failing to significantly drive up consumer prices.
Trivedi notes that past dollar rallies driven by tariff announcements tend to fade quickly once implementation begins, often triggering equity volatility and reduced safe-haven demand.
Japan’s currency, meanwhile, has begun to regain strength. Following a closely watched parliamentary election that saw the ruling coalition lose its upper house majority, the Japanese yen firmed against the dollar. The USD/JPY pair fell 0.6%, reflecting renewed bets on a Bank of Japan rate hike later this year.
This shift in sentiment is amplified by Goldman’s assessment that the yen's bearish positioning has likely overshot fundamentals. If Japan’s fiscal policy holds steady post-election, a sharper yen recovery may follow—especially as tariff concerns re-escalate globally.
Goldman expects the Federal Reserve to remain cautious and lean toward rate cuts sooner than market consensus. Recent U.S. inflation data appears mixed, with slight tariff-related increases offset by weakening price momentum elsewhere. If growth continues to slow, the case for easing strengthens—and so does the potential for the dollar to weaken, particularly against the yen.
While the U.S. dollar's bounce has been impressive, its foundation looks shaky. Political infighting, tariff tensions, and diverging global monetary paths could tip sentiment. As Japan regains macro momentum and Fed policy shifts into dovish territory, the dollar could face renewed headwinds—with USD/JPY potentially leading the correction.
