Bearish consensus on the dollar deepens despite a stable economic framework

About the Dollar

The U.S. dollar remains significantly overvalued — according to Goldman Sachs estimates, it is trading more than 15% above fair value based on structural models. Bearish sentiment is at extremes: hedge funds are holding massive short positions, demand for protection against a dollar decline is rising, and positioning is stretched across all fronts. Let’s explore the prevailing consensus views supporting this narrative, as well as the factors that could challenge it.

15% Overvalued

Goldman Sachs: “The dollar is just over 15% overvalued in both of our structural models.”

Overvalued and with Further Downside Potential

Michael Cahill, FX strategist at GS: “The dollar is overvalued, and we believe it is likely to depreciate further. In FX, valuation alone is not a catalyst — it doesn’t represent a strong anchor since there are no cash flows like coupons or dividends. Instead, we use it as a starting point: why is the currency over- or undervalued, and will those forces change? That gives us a sense of asymmetries and risks in the currency outlook. The dollar has been overvalued for a while, but we believe the ‘exceptional’ forces supporting it are starting to weaken. In such moments, structural valuation becomes the best context for potential moves.”

The Bearish Dollar Case Remains Active

1. Trade tariffs are a temporary hit, not a policy reversal — the U.S. strategy remains in place.
2. The “Dollar Smile” still supports global growth if tariff risks fade — not just improvements in the U.S.
3. Limited upside potential for the dollar via rate hikes, especially with rising pressure from the so-called “term premium” — it would take an American “exceptionalism” narrative reversal to change course. (source: JPM)

Reasons Behind the Overvaluation

The signal comes from the dollar’s strength compared to historical values and the widening U.S. current account deficit.

Hedge funds’ short position on the dollar is significant…

The Dollar as a Risk Asset

Morgan Stanley: “The extremely high correlation of the dollar with equities indicates investors are treating it almost like a risk asset.”

Dollar vs Nasdaq

The short-term divergence is extremely wide.

More on the Equity Link

The outperformance of the U.S. stock market explains much of the excessive exposure to the dollar.

Everything Is Priced In

Sentiment toward the dollar = maximum bearish…