Goldman Sachs: The US dollar will remain overvalued by about 15% in 2026; the reevaluation of tech "exceptionalism" poses a major downside risk.

Goldman Sachs delivered a clear signal to the market in its 2026 global forex outlook: The dominance of the US dollar is loosening, but has not collapsed.

According to Chasing Wind Trading Desk, on January 10, the Goldman Sachs Kamakshya Trivedi team released a research report, stating that the core logic is: Although the current valuation of the US dollar is still overvalued by about 15% according to Goldman Sachs’ GSDEER model, and the US's economic performance advantage over the rest of the world is narrowing, this does not mean the dollar will collapse immediately.

Goldman’s base case is that the dollar will experience a “slow downward process”, driven by strong global growth and more balanced asset returns. However, for investors, the most concerning tail risk does not come from traditional macroeconomic data, but from structural changes in capital markets—if the “exceptionalism” of US tech stocks is reevaluated, for example, by moments similar to “DeepSeek 2.0” that cause capital to stop flowing into US assets, then the dollar could face much sharper depreciation than expected.

Additionally, Goldman Sachs believes that 2026’s forex trading opportunities will be more apparent in pro-cyclical currencies and specific emerging market currencies, rather than outright dollar short trades.

The Dollar’s Slow Retreat and the Sword Suspended Over Tech Stocks

Goldman’s core view is based on a long-term judgment: the weakening of the US’s relative advantage will eventually lead to a weaker dollar.

Although the dollar suffered a sharp drop in 2025 before stabilizing due to the resilience of the US economy, Goldman expects a tug-of-war to repeat in 2026. On one hand, strong global growth and improved risk sentiment are generally negatively correlated with the dollar, and considering the high valuations accumulated by the dollar over the past decade, such an adjustment is reasonable. On the other hand, Goldman’s economists forecast US growth in 2026 far above market consensus, which means the US economy may be strong enough to maintain the dollar’s high valuation base.

However, the downside risks facing the dollar are not merely cyclical macroeconomic adjustments.

Goldman especially points out that a key factor supporting the dollar’s overvaluation and financing the US current account deficit in recent years has been global investors’ fervent demand for US stocks, especially technology stocks. While Goldman expects productivity gains from artificial intelligence to continue, the key issue is whether these gains will spread globally and whether capital returns can match current lofty tech stock valuations.

If faith in US tech “exceptionalism” wavers—even just a moment of technological disruption challenging existing expectations—this could trigger a reversal in capital flows, causing a major hit to the dollar.

The Euro Returns to Fair Value and the Pound’s Structural Dilemma

Among G10 currencies, the outlook for European currencies is noticeably divergent.

After strong performance in 2025, the euro’s exchange rate against the dollar is now close to “fair value”, and even slightly overvalued on a broad basis. Goldman believes further euro appreciation will mainly be driven by broad dollar weakness, rather than explosive growth in the eurozone itself. Nevertheless, increased European fiscal spending and global portfolio diversification will continue to support the euro, allowing it to gently rise alongside the dollar’s decline.

By contrast, the outlook for the pound is bleak. Goldman unambiguously labels the pound as Europe’s “laggard”. According to the GSDEER model, the pound is the most structurally overvalued currency among the G10.

Pressure from UK fiscal consolidation and lackluster domestic cyclical prospects mean basic support for the pound is lacking. More crucially, Goldman predicts that the Bank of England will cut rates more than the market expects in 2026, with three 25-basis-point cuts anticipated before year-end. This policy divergence will cause the pound to underperform its European peers; Goldman advises investors to short the pound in cross trades, for example, going long euro against the pound.

Tech Wave and Valuation Divergence: The New Map for Asian Currencies in Goldman’s Eyes

In the Asian market, Goldman draws a picture driven by tech cycles and valuations.

Goldman favors low-yield Asian currencies closely linked to the tech supply chain, such as the Korean won, the New Taiwan dollar, and the Malaysian ringgit, believing they will outperform high-yielding currencies like the Indonesian rupiah and Philippine peso in 2026. The Korean won in particular will benefit not only from AI-related investment enthusiasm but also from hundreds of billions of passive inflows triggered by its inclusion in the FTSE World Government Bond Index (WGBI) in 2026. In addition, the National Pension Service (NPS) of Korea is restarting its FX hedging plan, which may result in about $50 billion in forward US dollar sales, further supporting the won’s exchange rate.

Carry and Cyclical Opportunities in Emerging Markets

For investors seeking high yields in emerging markets, Goldman advises focusing on currencies with improving fundamentals and attractive valuations.

Despite political noise, the Brazilian real and Colombian peso offer considerable carry space due to their high real interest rates and undervalued exchange rates. Especially the South African rand, Chilean peso, and Peruvian sol—all not only undervalued, but as pro-cyclical currencies, stand to benefit from rising global commodity prices (particularly the divergence of metal prices vs. energy prices) and resilient Chinese growth.

Goldman emphasizes, in the current environment of implied volatility, using options and other tools to position for the volatility in these currencies is a highly cost-effective strategy, as current market pricing clearly underestimates potential macro uncertainty.

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