Goldman Sachs: Rate differentials still dominate the dollar, while AI capex reinforces upside tail risks for the dollar
AI summary card
Goldman Sachs: Rate differentials still dominate the dollar, while AI capex reinforces upside tail risks for the dollar
The report believes short-term risks for the dollar remain skewed to the upside, with low-yield currencies under pressure in a high US Treasury yield environment, while favoring JPY, THB, and ILS as funding currencies and preferring long MYR versus SGD.
- The recent dollar strength mainly came from changes in rate differentials following the Fed’s hawkish reaction; the decline in oil prices did not alter the stronger explanatory power of rate differentials for FX.
- THB, ILS, and CLP were the weakest EM currencies against the dollar across major regions over the past week, consistent with the view that low-yield currencies come under pressure in a US rates bear-flattening environment.
- Sterling has found short-term support from reduced political uncertainty and short covering, but fiscal constraints and the autumn budget could return to focus.
- USD/JPY has risen close to 162. Intervention risk remains high, but high US Treasury yields, low recession risk, and gradual BOJ hikes make JPY’s funding characteristics more prominent.
- The Malaysian ringgit has been disturbed in the short term by political risk, but the current account, data center service exports, and macro fundamentals still support MYR strength against SGD.
- The AI trade has supported relative US equity performance, shifting from what was initially expected to be a dollar headwind into a dollar support factor, but narrow market breadth and the durability of earnings upgrades limit FX spillover.
Report interpretation
Overview
This Goldman Sachs GLOBAL FX TRADER report focuses on the dollar, low-yield EM currencies, sterling, the yen, the Malaysian ringgit, and the impact of the AI trade on the dollar. The core judgment is that rate differentials remain the key variable explaining the dollar’s recent break out of its range; against the backdrop of hawkish Fed pricing and AI-related capital spending, short-term risks for the dollar remain skewed to the upside, but the medium-term path is more balanced and depends on future rate hike expectations, US growth momentum, and policy credibility risks.
Core views
The first main theme of the report is that the dollar has returned to the basic logic of rate-differential-driven performance. Goldman Sachs believes that the hawkish reaction after last week’s FOMC drove changes in rate differentials and explained dollar strength; in the short term, the probability of hikes may rise quickly but fall back only slowly, so risks for the dollar are skewed higher. The second theme is that low-yield currencies are better suited as the funding leg: THB, ILS, and CLP have been the weakest performers recently, and THB and ILS are more suitable as funding currencies for EM carry baskets due to domestic policy factors. The third theme is the impact of political and fiscal premia on sterling: sterling’s political premium has compressed significantly, but the difficulty of fiscal consolidation and the gilt market’s tolerance remain subsequent risks. The fourth theme is stronger yen funding characteristics: although the risk of intervention by Japanese authorities remains high, elevated US Treasury yields and gradual BOJ tightening make JPY more attractive as a funding currency. The fifth theme is improving MYR fundamentals: political risk has caused temporary volatility, but the current account, exports, and data center services are expected to support the ringgit. The sixth theme is AI support for the dollar: the US AI trade and relative equity performance increase demand for dollar assets, but narrow market breadth and insufficient durability of earnings upgrades limit fully synchronized dollar strength.
Analysis framework
The report adopts an analytical framework combining macro rate differentials, currency valuation models, risk-asset sensitivities, political risk premia, and current-account fundamentals. For the dollar, it focuses on Fed policy expectations, relative US growth, and AI capital spending; for EM FX, it compares yields, valuation deviations, and risk exposure to tech equities, copper prices, and gold; for sterling, it cross-checks through political and fiscal premium compression, EU-UK rate differentials, and EUR/GBP moves; for MYR, it combines GDP, the current account, exports, and changes in ICT service exports.
Methodology notes
Equilibrium exchange rates and valuation deviations
The report uses a 60:40 blend of GSDEER and GSFEER to assess currency valuation, noting that ILS is about 10% overvalued, CLP about 15% undervalued, and THB roughly fair value.
Proxy indicator for sterling political and fiscal premia
The report states that sterling’s premium briefly approached about 2.5% in May and has recently compressed to around zero, indicating that the easing of political risk has been fairly well absorbed by the market.
Linkage between policy rate expectations and exchange rates
The report argues that the relationship between rate differentials and exchange rates is more stable and more significant, making it the main factor explaining the dollar’s recent strength and the pressure on low-yield currencies.
Currency sensitivity to tech stocks, copper prices, and gold
The report distinguishes the funding characteristics of ILS, CLP, and THB: ILS has high sensitivity to tech equities, CLP has the greatest exposure to copper prices and cyclical risk, and THB is more likely to lag if gold prices continue to decline.
Spillover from relative US equity performance to the dollar
Using weekly regression samples since 2000, the report shows that relative US equity performance can proxy for broader balance-of-payments pressures, but short-term earnings upgrades and narrow market breadth can weaken dollar demand.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- USDCore macro variable
- Strengths
- Supported in the short term by hawkish Fed pricing, wider rate differentials, and AI-related capital spending.
- Weaknesses
- In the medium term, if hike expectations are priced out, US growth slows, or policy credibility concerns return, the dollar may move back into its prior range or weaken.
- Comparison
- Compared with oil price changes, rate differentials have more stable explanatory power for the dollar; compared with relative equity performance, FX reactions are still constrained by market breadth and earnings durability.
- Risks
- A renewed dovish Fed shift, weaker US data, an institutional credibility shock, or renewed improvement in global growth could all weaken the dollar.
- THBEM funding currency
- Strengths
- Its low-yield characteristics are clear, and domestic structural challenges plus policy tolerance for a weaker currency make it suitable as the funding leg for carry trades.
- Weaknesses
- Valuation is roughly fair, and if gold prices rebound or dollar rate differentials fall back, further depreciation potential may be limited.
- Comparison
- Compared with ILS and CLP, THB has lower beta to equity risk, but it is more likely to lag if gold prices continue to fall.
- Risks
- Changes in Thai policy, a rebound in gold prices, or improved global risk appetite could weaken the short thesis.
- ILSEM funding currency
- Strengths
- Low-yield and about 10% overvalued, with Bank of Israel rate cuts and dollar-buying intervention reinforcing the weak-currency logic.
- Weaknesses
- It has high sensitivity to tech stocks, so a renewed strong rally in tech could support ILS.
- Comparison
- Compared with THB, ILS is more sensitive to tech stock volatility; compared with CLP, it has lower exposure to copper prices and cyclical risk.
- Risks
- A tech rebound, easing geopolitical risk, or a policy shift could pressure ILS shorts.
- CLPCurrency with cyclical and copper-price exposure
- Strengths
- About 15% undervalued and may have valuation support if copper prices or the global cycle improve.
- Weaknesses
- It has the highest exposure to copper prices and broad cyclical risk, making it vulnerable when growth concerns intensify.
- Comparison
- Compared with ILS and THB, CLP behaves more like a hedge on copper prices and cyclical risk.
- Risks
- A rebound in copper prices could support CLP; if used as a funding currency, attention is needed for rebound risk stemming from undervaluation.
- JPYG10 funding currency
- Strengths
- When Fed expectations turn more hawkish, JPY may be a lower-volatility funding leg than other low-yield currencies.
- Weaknesses
- With USD/JPY close to 162, intervention risk from Japan’s Ministry of Finance remains high.
- Comparison
- The report believes CAD and CHF also remain attractive for funding, but JPY reacts more mildly when equity and bond moves diverge.
- Risks
- Intervention by Japanese authorities, weaker US data, or a faster-than-expected BOJ hiking pace would lift JPY.
- GBPPolitical and fiscal risk currency
- Strengths
- Reduced leadership uncertainty, compressed political premium, and reduced short positioning provide near-term support.
- Weaknesses
- Slower fiscal consolidation, spending pressure, and limited tax room could again weigh on sterling ahead of the autumn budget.
- Comparison
- EUR/GBP appears stable on the surface, but underneath it reflects an offset between sterling premium compression and wider EU-UK rate differentials.
- Risks
- Lower gilt market tolerance for front-loaded borrowing, pressure from fiscal rules, or deteriorating risk appetite.
- MYRRelative long in Asian FX
- Strengths
- Current account surplus, export data, and improved data center service exports support MYR, and the report continues to favor long MYR versus SGD.
- Weaknesses
- State elections and the possibility of an early general election create a domestic political risk premium.
- Comparison
- Compared with SGD, the report argues that SGD NEER is 1.4% above its midpoint, and expects MAS to leave policy parameters unchanged in July.
- Risks
- If an early Malaysian general election creates greater uncertainty, or if oil prices and regional exports deteriorate, MYR’s rebound may be hindered.
- AI-related US equity performanceDollar support factor
- Strengths
- The AI trade has boosted relative US equity performance, shifting from an expected dollar drag into a source of dollar support.
- Weaknesses
- Recent earnings expectation upgrades are skewed toward the short term, and equity market breadth is narrow, limiting spillover to the dollar.
- Comparison
- Compared with developed markets, US equities have outperformed more clearly; compared with emerging markets, the liquidity impact on dollar assets has not been fully synchronized.
- Risks
- Slower AI investment momentum, insufficient earnings durability, or further narrowing in market breadth would weaken support for the dollar.
Key data
- Short-term dollar directionRisks skewed to the upsideThe report believes hike probabilities may rise quickly but fall back slowly, with rate differentials supporting short-term dollar strength.
- Medium-term dollar directionMore balancedIf future hiking expectations are repriced, US growth slows in the second half, or concerns about institutional credibility re-emerge, the dollar could still weaken.
- USD/JPYSpot about 162; 3 months 160; 6 months 158; 12 months 155Although intervention risk remains high, elevated US Treasury yields and gradual BOJ tightening make JPY’s funding characteristics more prominent.
- EUR/USDSpot 1.14; 3 months 1.14; 6 months 1.18; 12 months 1.20The forecast implies medium- to long-term dollar weakness relative to the euro.
- GBP/USDSpot 1.32; 3 months 1.33; 6 months 1.34; 12 months 1.33Compression in sterling’s political premium provides tactical support, but fiscal challenges remain.
- USD/MYRSpot 4.12; 3 months 3.90; 6 months 3.80; 12 months 3.70The forecast implies MYR appreciation against the dollar, supported by the current account and data center service exports.
- USD/CNYSpot 6.80; 3 months 6.80; 6 months 6.70; 12 months 6.50The forecast shows moderate RMB appreciation against the dollar over a 12-month horizon.
- THB, ILS, CLP valuationILS about 10% overvalued, CLP about 15% undervalued, THB roughly fair valueBased on the 60:40 valuation blend of GSDEER and GSFEER.
- Sterling premiumPeaked at about 2.5% in May, recently down to around zeroReduced political uncertainty and short covering in sterling have driven the rebound.
- Malaysia real GDP forecast2026 YoY 4.2%; 2025 at 5.2%The report argues that MYR’s initial weakness came more from domestic political risk than from deteriorating macro fundamentals.
- Malaysia current accountQ1 2026 surplus at 3.0% of GDPAbove the 5-year average of 2.3%, supported by improved commodity trade and services balance.
- Malaysia ICT services contributionAround -0.2% of GDP before 2025, turning to about +0.2% since 2H25After data centers come online, service exports could become a new pillar of the current account.
- USD 12-month total return forecast-4.7%The table forecast shows that despite near-term support for the dollar, it may still weaken over a 12-month horizon.
Impact & implications
From an investment perspective, FX portfolios should continue to respect rate differentials and policy pricing rather than judge the dollar solely based on oil prices or moves in a single risk asset. Low-yield currencies are better suited as the funding leg during periods of rising US rates, especially THB and ILS; although the yen faces intervention risk, it remains a relatively low-volatility funding choice when Fed expectations continue to turn more hawkish. MYR, meanwhile, is supported by improving fundamentals and growing service exports, making it a relative long expression within Asian FX. The significance of the AI theme for the dollar is that it is not just an equity theme; it may also change FX direction through relative US growth, capital spending, and asset demand, but the strength of spillover depends on earnings durability and market breadth.
Risks
- If the Fed does not turn more hawkish, or if markets later reprice toward cuts / remove hike expectations, the short-term bullish dollar logic could reverse.
- If US growth slows in the second half as positive economic impulses fade, the dollar could turn weaker.
- FX intervention by Japanese authorities at elevated USD/JPY levels could cause short-term drawdowns in JPY shorts or JPY-funded trades.
- The pace of UK fiscal consolidation, spending pressure, and the autumn budget could push sterling risk premia higher again.
- If Malaysia’s state elections or an early general election intensify coalition uncertainty, MYR’s rebound could weaken.
- Changes in gold, copper, and tech stock prices will affect the relative performance of funding currencies such as THB, CLP, and ILS.
- If the AI trade cannot translate into sustained profitability or broader market gains, its support for the dollar may be overestimated.
- The report contains global legal and regulatory disclosures, and views may change with market, policy, and economic data.
What to watch
- The impact of FOMC communication, US inflation, and labor data on hike probabilities and rate differentials.
- US AI-related capital spending, the durability of tech earnings expectations, and US equity market breadth.
- Trading behavior in USD/JPY above 160 and potential intervention windows for Japan’s Ministry of Finance.
- The UK autumn budget, fiscal rule commitments, and gilt market reactions.
- Performance of Thai, Israeli, and Chilean currencies against the dollar and versus high-yield EM currencies.
- The results of state elections in Johor and Negeri Sembilan, Malaysia, and whether early general election risk emerges.
- Malaysia’s data center service exports, current account, and high-frequency export data.
- Transmission of copper prices, gold prices, and global cyclical risk to CLP, THB, and other EM FX.