AI capex peaking = the dollar peaking? Goldman Sachs 2027 outlook: the dollar is about to see its "last rally"

The dollar is deeply tied to AI capex expectations, and Goldman Sachs warns: when the AI narrative fades, the dollar will come under pressure. In its "2027 Global FX Outlook" report, Goldman Sachs' FX strategy team noted that the dollar still has room to rise in the near term, but will face a substantial reversal in 2027. After large-scale selling and diversification in 2025, the dollar quietly recovered its losses in 2026 EUR/USD fell back to its lowest since "Liberation Day," the Dollar Index (DXY) hit its highest since April 2025, and USD/JPY approached the 160 mark. Goldman believes the core DRIVE supporting this rally is precisely the continued heating up of AI-related investment expectations, and once this expectation peaks, the dollar will face the same inflection point. Data shows that foreign investors net purchased a record US$1.47 trillion of U.S. equities and corporate bonds in the year through August, nearly double the pre-global-financial-crisis peak. About 90% of foreign-held U.S. equities represent unrealized gains rather than actual incremental buying, while hedge ratios are at historic lows in other words, a structural shift higher in hedge ratios alone would be enough to exert substantial pressure on the dollar without large-scale capital outflows. Goldman warns that once AI capex expectations show signs of peaking, investors may demand greater price concessions including concessions at the exchange-rate level. **Dollar back in overvalued territory, AI becomes the core supporting variable** Dollar valuation has returned to historically elevated levels. Goldman's exchange-rate misalignment model shows the trade-weighted dollar is about 13% overvalued versus fair value, up sharply from 7% in September; the overvaluation versus Asian currencies has remained at around 25% and has never truly narrowed. Goldman strategists Kamakshya Trivedi and Michael Cahill explicitly characterize the dollar as an "AI trade" in the report: "Dollar performance is highly correlated with AI-related equity performance for better or worse." This judgment is backed by data: within the structure of foreign capital inflows into the U.S., the share of private purchases of U.S. corporate equities has surged to the top of its 40-year historical range. Notably, the 2026 FX market presents a rare paradox: annual FX positioning changes were the largest in history, yet actual exchange-rate trading ranges were extremely narrow. Goldman attributes this to a market environment combining low recession risk with limited policy divergence, allowing carry trades to dominate the year while directional bets generally suffered. **Fed's hawkish stance provides near-term support for the dollar** Goldman does not recommend shorting the dollar now, owing to the Fed's persistently hawkish policy signals. After the latest inflation data significantly beat expectations only one of 70 forecasters predicted a higher reading Goldman 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 support for the dollar. Goldman's baseline forecast holds that inflation will eventually moderate and the Fed's actual tightening will be far less than what the market is currently pricing, at which point the dollar will come under pressure. But the bank concedes that near-term risks remain "skewed toward dollar strength," especially if spillovers from tighter U.S. financial conditions further expose Europe's vulnerabilities. On the euro, Goldman 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 near-stagnant economy in the first half (this forecast is below consensus); it then rebounds to 1.15 by end-2027. Goldman also notes that credible fiscal consolidation measures in France may not land 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 Goldman's designated AI hedge. According to the bank's preferred fair-value model, the yen is about 30% undervalued against the dollar, one of the most significant valuation deviations among G10 currencies. On the policy front, the BOJ's stance is genuinely shifting. Goldman economists expect the BOJ to raise its policy rate to 2% by June 2027, implying three more 25bp 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 gained an average of about 0.3%, making it the best-performing G10 currency. Goldman's 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 market doubts about AI expectations are more pronounced, the adjustment could significantly exceed the above forecasts." **AI debt bubble and hedge ratios are the two major risks** The fragility of the AI narrative is not only reflected in equity valuations. Global AI-related debt issuance had reached US$687 billion by early November, while excess liquidity is contracting and earnings upgrade momentum is slowing. Goldman estimates that AI investment accounts for about two-thirds of U.S. real GDP year-on-year growth in Q3; once financing conditions tighten, the most heavily indebted participants will be hit first, and the potential shock will extend far beyond the tech sector. Deutsche Bank strategist George Saravelos previously issued a similar warning, noting that of the more than US$20 trillion in U.S. equities held by foreigners, about 90% represents mark-to-market price appreciation rather than actual buying, and overall hedge ratios are extremely low in other words, a structural shift higher in hedge ratios alone would be enough to exert substantial pressure on the dollar without large-scale capital outflows. **2027 FX landscape: who wins and who loses** Goldman's 2027 FX total-return ranking revolves around four main themes: commodity-sensitive currencies rebounding as energy prices normalize, AI spillovers continuing to transmit to Asian currencies, carry returns narrowing but remaining positive, and the yen gaining sustainable policy support. In the expected total-return ranking, high-yielding currencies the Brazilian real (about 15%) and the South African rand (about 10%) top the list; the Israeli shekel, Norwegian krone, and the dollar itself are at the bottom. Goldman concedes 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 in a scenario of the dollar strengthening more than expected or falling at an accelerating pace, current volatility pricing fails to fully reflect either. This article is reproduced from "Wall Street See" (), author: Xu Chao; GMTEight editor: Yan Wencai.