• The US dollar could decline by as much as 15% by the end of 2023, but a larger move is "certainly possible," Goldman Sachs said. 
  • The trajectory of the pandemic, the development of a successful vaccine, and the election outcome are factors affecting the timing of the dollar weakness, Goldman Sachs economist Zach Pandl said.
  • A Democratic blue wave would bring about a huge stimulus package, but would also put pressure on the dollar, the US bank said.
  • Even if Donald Trump is re-elected, market focus will shift to vaccine distribution and global economic performance by next year. That scenario makes Goldman Sachs expect dollar weakness in any case. 
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The dollar could depreciate by 15% by the end of 2023 irrespective of the election outcome, and an even larger dip is "certainly possible," Goldman Sachs said.

The greenback is currently overvalued by 10% to 15% based on several reasons, according to Zach Pandl, co-head of global FX and EM strategy at Goldman Sachs.

A drop on this scale would bring the dollar index to its lowest since late 2014.

A sustained environment of deeply negative real interest rates in the US and a continued sharp global economic recovery from the Covid-19 recession is the "standard recipe for broad dollar weakness," Pandl said.

"We are currently forecasting about a 15% depreciation in the real trade-weighted dollar from this year's peak to the end of 2023, but a larger move is certainly possible," Pandl said. 

Other factors affecting the timing of the dollar's weakness include the pandemic's course, vaccine development, and the election outcome. But these won't impact the medium-term dollar outlook, he noted.

"Investors still seem reluctant to embrace a lower dollar view for the remainder of this year and through 2021, given the looming uncertainty around the US election, the health of the global economy and how the US will perform relative to other markets. So, many investors are not positioned for a weaker dollar in the coming months."

Goldman expects a $2.5 trillion coronavirus relief package under a Democratic sweep, but that would also bring forward a longer slide in the dollar. If investors need to be compensated to buy more Treasury bonds to fund US deficits and the central bank continues to keep real rates low, the dollar may have to weaken to encourage foreign demand, Pandl said.

A Joe Biden presidency would mean a more multilateral approach to foreign policy, particularly US-China relations. That could boost the yuan against the dollar, Pandl said. The dollar may also weaken if foreign demand for US equities falls after proposals are executed to raise corporate taxes and increase technology regulation.

A status-quo outcome, where President Donald Trump gets re-elected and Republicans hold the Senate, would see the dollar well-supported through the end of 2020. But market focus will shift to vaccine distribution and global economic performance by next year, meaning that eventual dollar weakness is likely in any case, Pandl said.

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