Goldman Sachs analyzes the logic behind the sharp drop in the US dollar: Similar to "Brexit", foreign investors are selling US stocks instead of US bonds.

Over the past decade, the excellent return on assets in the United States has attracted a steady influx of global capital, with money from Europe, Japan, Asian sovereign funds, and even oil-producing countries in the Middle East continuously increasing their investments in US stocks and bonds. As funds continue to flow in, the US dollar has surged as well, but now the "exceptionalism" of this situation has been shattered. Tony Pasquariello, head of hedge fund business at Goldman Sachs, recently released a report pointing out that the US dollar is currently overvalued by 20%, a result of American exceptionalism. Tariffs are undermining the core pillar of a strong US dollar, and this time it is a confrontation between the United States and the world, more similar to "Brexit" than the first trade war. In addition, Goldman Sachs pointed out that so far, it has mainly been Eurozone investors selling off US stocks, with foreign investors not massively selling off US Treasury bonds. Tariffs are hitting at the core logic of the US dollar. Goldman Sachs highlighted three main reasons why the US dollar may weaken significantly: 1. Valuation bubble: The current valuation of the US dollar deviates from its fundamentals, with an overvaluation of 20%. 2. Profits and consumption are damaged: The results of Trump's tariffs not only lead to price increases, but more deeply, they hurt US company profits and the consumption capacity of US households, which are the engines of "American exceptionalism." In other words, tariffs are shaking the core pillar on which the strong US dollar relies. 3. Structural capital outflows: This is not like the trade frictions of 2018, but more like the "American version of Brexit." In 2018, it was the US against individual countries, but now it is the US against the whole world, not sparing even allies, with the EU, Japan, Canada, South Korea all being targeted. This is not a tactical friction, but a structural decoupling. Goldman Sachs also mentioned a key risk in the report. Currently, there are $2.2 trillion in USD-related assets globally that are not hedged against currency risk. Once investors decide to retreat, the impact will be significant. For example, from January 2017 to the end of January 2018, some funds flowed out of USD assets and into assets in the Eurozone and other regions, resulting in a 20% increase in the Euro against the USD, directly breaking the traditional linkage between interest rate differentials and exchange rates. Foreign investors are selling off US stocks, not US bonds. Goldman Sachs believes that the starting point of this round of adjustment is the historically high proportion of US assets in global investment portfolios. However, Goldman Sachs emphasizes that the current actions of foreign funds are not a drastic sell-off of USD assets, but are driven by a shift in marginal demand. For example, while Eurozone investors are starting to sell off US stocks, "other countries and regions" are still buying US assets. At the same time, investors are more cautious about US bonds and have not sold off US bonds across the board. Although they have reduced some holdings of long-term US Treasury bonds, much of this money has been redirected to short-term US bonds, with the hedging effect still in effect. Furthermore, as there is still a lack of more attractive alternative assets globally, some funds will not directly sell off US assets but will adjust through hedging currency risks, that is, selling off USD but keeping the underlying assets. Goldman Sachs emphasizes that the overweight positions in USD assets have been accumulated over many years, and adjustment will also take time. This article is a reprint from Wall Street News, GMTEight Editor: Chen Wenfang.