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Goldman Sachs suggests that the dollar’s downtrend will continue due to structural factors. They identify two main drivers impacting the dollar’s outlook.
Portfolio Hedging Flows
The first driver is portfolio hedging flows. The reduction of institutional independence in the US has diminished the appeal of dollar-denominated assets. This encourages diversification away from the dollar, causing persistent pressure on the currency as US policy remains unchanged.
The second driver involves China’s strategy concerning its currency, the yuan. Goldman Sachs contends that Beijing’s recent policies aim for a more stable yuan to enhance its global role. The yuan is becoming a regional anchor, which will eventually lead to broader foreign exchange effects.
Goldman Sachs indicates that for the dollar’s weakness to endure, these adjustments must extend beyond Europe. With China increasingly stepping up to occupy that role, this paves the way for continued depreciation of the greenback.
The structural forces pushing the dollar lower appear to be long-term, suggesting any recent strength is a temporary rally rather than a trend reversal. For the coming weeks, derivative traders should see these upswings as opportunities to establish positions that will profit from further dollar weakness. This could involve buying longer-dated put options on dollar-tracking ETFs or shorting U.S. Dollar Index (DXY) futures contracts.
We are seeing sustained hedging flows away from dollar assets, fueled by concerns over the policy direction in Washington. The latest Treasury International Capital (TIC) report for July 2025 confirmed this, showing a net outflow of private foreign capital for the third straight month. This constant selling pressure creates a ceiling for the dollar, making it difficult for any rally to gain momentum.
China’s Currency Strategy
At the same time, China’s policy of promoting a stable, international yuan is creating a powerful alternative. Data from the second quarter of 2025 showed yuan-denominated trade settlements with ASEAN partners grew by over 15% year-over-year, reinforcing its role as a regional anchor. Traders should watch the USD/CNH pair, as sustained yuan strength here will weigh on the broader dollar index.
This environment is reminiscent of the dollar’s multi-year decline from 2002 to 2008, when the rise of the euro and structural U.S. deficits created a similar dynamic. During that period, a strategy of selling into dollar rallies was highly effective. Therefore, traders might consider using periods of low volatility to build positions that anticipate a gradual slide rather than a sudden collapse.
For this weakness to persist, these currency adjustments must extend beyond Europe, which appears to be happening now. Look for opportunities to short the dollar against a basket of currencies, including those of commodity exporters and key Asian economies. This diversification can provide a more robust position as the long-term downtrend unfolds.
