The dollar is deeply tied to expectations for AI capital spending, and Goldman Sachs warns that when the AI narrative fades, the dollar will come under pressure as well.

In its "2027 Global FX Outlook" report, Goldman Sachs (NYSE: GS) foreign exchange strategy team said the dollar still has room to rise in the near term but will face a substantial reversal in 2027. After heavy selling and diversification in 2025, the dollar quietly recouped its losses in 2026 — EUR/USD fell back to its lowest level since "Liberation Day," the dollar index (DXY) touched its highest point since April 2025, and USD/JPY approached the 160 mark. Goldman Sachs believes the core driver behind this rally is the continued rise in AI-related investment expectations, and once that expectation peaks, the dollar will face the same turning point.

Data shows that foreign investors bought a record $1.47 trillion in U.S. equities and corporate bonds on a net basis in the year through August, nearly double the pre-global financial crisis peak. About 90% of foreign-held U.S. equities reflect unrealized paper gains rather than actual incremental purchases, while hedging ratios sit at historic lows — in other words, a structural shift higher in hedging ratios alone would be enough to put meaningful pressure on the dollar without the need for large-scale capital outflows. Goldman Sachs warns that once AI capital spending expectations show signs of peaking, investors may demand a larger price discount — including concessions at the exchange-rate level.

Dollar returns to overvalued territory, with AI as the core supporting variable

Dollar valuation has returned to historically elevated levels. Goldman Sachs' exchange rate misalignment model shows the trade-weighted dollar is about 13% overvalued relative to fair value, up sharply from 7% in September; the overvaluation against Asian currencies has consistently remained around 25% and has never truly narrowed.

Goldman Sachs strategists Kamakshya Trivedi and Michael Cahill explicitly characterize the dollar as an "AI trade" in the report, saying "the dollar's performance is highly correlated with the performance of AI-related stocks — whether the market is doing well or badly." This judgment is backed by data: within the structure of foreign capital inflows into the United States, the share of private purchases of U.S. corporate equities has surged to the top of a 40-year historical range.

It is worth noting that the 2026 foreign exchange market presented a rare paradox: annual FX positioning changes were the largest on record, yet actual exchange rate trading ranges were extremely narrow. Goldman Sachs attributes this phenomenon to a market environment combining low recession risk and limited policy divergence, which allowed carry trades to dominate the year while directional bets generally struggled.

Hawkish Fed stance provides short-term support for the dollar

Goldman Sachs does not recommend shorting the dollar right now, citing the Federal Reserve's persistently hawkish policy signals. After the latest inflation data significantly beat expectations — with only one of 70 forecasters projecting a higher reading — Goldman Sachs economists raised their forecast for rate hikes this year to three.

The 10-year Treasury yield has returned above 5%, and the latest PPI data hit a four-year high, both providing阶段性 support for the dollar. Goldman Sachs' base case holds that inflation will eventually moderate and the Fed's actual tightening will be far smaller than what the market is currently pricing, at which point the dollar will come under pressure. But the bank acknowledges that near-term risks still "skew toward dollar strength," especially if spillover effects from tighter U.S. financial conditions further expose Europe's vulnerabilities.

On the euro, Goldman Sachs forecasts EUR/USD will fall to 1.08 within three months, mainly due to the lagged transmission of terms-of-trade deterioration from the energy shock and France's economy nearly stalling in the first half (below consensus expectations); it then expects a rebound to 1.15 by the end of 2027. Goldman Sachs also notes that credible fiscal consolidation measures in France may have to wait until after the June parliamentary elections, and such measures often require market pressure as a political catalyst.

Yen: 30% undervalued, policy shift provides structural support

If the dollar is the long side of the AI trade, the yen is the AI hedge tool Goldman Sachs has set up. According to the bank's preferred fair value model, the yen is about 30% undervalued against the dollar, making it one of the G10 currencies with the most significant valuation deviation.

On the policy front, the Bank of Japan's stance is genuinely shifting. Goldman Sachs economists expect the BOJ to raise its policy rate to 2% by June 2027, implying three more 25-basis-point hikes, above the market's current implied pricing of about 1.75%. The bank also notes that since early October, on trading days when the Nasdaq underperformed the S&P 500 by more than 1%, the yen has gained an average of about 0.3%, making it the best-performing G10 currency.

Goldman Sachs' path forecast for USD/JPY is 158 in three months, 155 in six months, and 150 in twelve months, about 6% below the current level of around 160. The bank also warns that "if the market's doubts about AI expectations become more pronounced, the adjustment could significantly exceed the above forecasts."

AI debt bubble and hedging ratios are the two major hidden risks

The fragility of the AI narrative is not only reflected in equity valuations.

Global AI-related debt issuance had reached $687 billion by early November, while excess liquidity is contracting and momentum for earnings upgrades is slowing. Goldman Sachs estimates that AI investment accounts for about two-thirds of the year-on-year increase in U.S. real GDP in the third quarter; once financing conditions tighten, the most heavily indebted participants will be hit first, and the potential shock will extend far beyond the technology sector.

Deutsche Bank strategist George Saravelos previously issued a similar warning, noting that of the more than $20 trillion in U.S. equities held by foreigners, about 90% reflects paper price appreciation rather than actual purchases, and overall hedging ratios are very low — in other words, a structural shift higher in hedging ratios alone would be enough to put meaningful pressure on the dollar without the need for large-scale capital outflows.

2027 FX landscape: who wins and who loses

Goldman Sachs' 2027 foreign exchange total return ranking revolves around four main themes: commodity-sensitive currencies rebounding as energy prices normalize, AI spillover effects continuing to transmit to Asian currencies, carry returns narrowing but remaining positive, and the yen receiving sustainable policy support.

In the expected total return ranking, high-yielding currencies such as the Brazilian real (about 15%) and the South African rand (about 10%) are at the top; the Israeli shekel, the Norwegian krone, and the dollar itself are at the bottom.

Goldman Sachs acknowledges that overall FX return potential is "relatively limited," but given that implied volatility is at historic lows, the bank believes "using cheap options to hedge tail risks" offers high cost-effectiveness — whether the scenario is an unexpectedly stronger dollar or an accelerated decline, current volatility pricing fails to fully reflect either.