Goldman Sachs: AI Capex Peak to Mark Dollar’s Last Rally Before 2027 Reversal

Goldman Sachs: AI Capex Peak to Mark Dollar’s Last Rally Before 2027 Reversal

TREE NEWS reports: The U.S. dollar has become inextricably linked to the artificial intelligence investment cycle, and when that cycle peaks, the dollar will likely follow, according to a new report from Goldman Sachs’ foreign exchange strategy team. In its 2027 Global FX Outlook, the bank argues that while the dollar may still have room to rise in the near term, a substantive reversal is likely in 2027.

After a massive selloff and diversification push in 2025, the dollar quietly recovered its footing in 2026. The euro has fallen to its lowest level since “Liberation Day,” the dollar index (DXY) has touched its highest since April 2025, and USD/JPY is approaching the 160 mark. Goldman attributes this rally largely to rising expectations for AI-related investment. But once those expectations crest, the dollar faces a similar turning point.

AI Becomes the Dollar’s Core Support

Foreign investors bought a record $1.47 trillion of U.S. equities and corporate bonds in the year through August, nearly double the pre-global financial crisis peak. Yet about 90% of foreign-held U.S. equities reflect unrealized gains rather than fresh capital inflows, and hedging ratios remain historically low. In other words, even a structural shift higher in hedging ratios could materially weigh on the dollar without requiring large-scale capital outflows.

Goldman’s FX misalignment model shows the trade-weighted dollar is about 13% overvalued versus fair value, up sharply from 7% in September. Overvaluation against Asian currencies has remained around 25% and never truly narrowed. Strategists Kamakshya Trivedi and Michael Cahill explicitly label the dollar an “AI trade,” noting its performance is highly correlated with AI-related stocks—both on the upside and the downside.

Fed Hawkishness Provides Near-Term Support

Goldman does not recommend shorting the dollar just yet, citing the Federal Reserve’s persistently hawkish signals. After the latest inflation data came in significantly above 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 reading hit a four-year high, both offering阶段性 support to the dollar.

Goldman’s base case assumes inflation will eventually moderate and the Fed’s actual tightening will be far less than markets currently price, which would then weigh on the dollar. But the bank acknowledges that near-term risks remain “skewed toward dollar strength,” especially if spillovers from tighter U.S. financial conditions expose vulnerabilities in Europe.

For the euro, Goldman forecasts EUR/USD at 1.08 in three months, below consensus, due to lagged terms-of-trade effects from the energy shock and near-stagnation in France in the first half. It then expects a rebound to 1.15 by end-2027. Credible fiscal consolidation in France may have to wait until after June parliamentary elections, and such measures often require market pressure as a political catalyst.

Yen: 30% Undervalued, a Structural Hedge

If the dollar is the long side of the AI trade, the yen is Goldman’s AI hedge. By the bank’s preferred fair value model, the yen is about 30% undervalued against the dollar, one of the most significant misalignments in G10. The Bank of Japan is expected to raise its policy rate to 2% by June 2027—three more 25bp hikes—above the roughly 1.75% currently priced. Since early October, on days when the Nasdaq underperformed the S&P 500 by more than 1%, the yen has averaged gains of about 0.3%, the best in G10.

Goldman forecasts USD/JPY at 158 in three months, 155 in six months, and 150 in twelve months, about 6% below current levels near 160. It warns that if market doubts about AI expectations become more pronounced, the adjustment could be significantly larger.

AI Debt Bubble and Hedging Ratios: Two Hidden Risks

The fragility of the AI narrative extends beyond equity valuations. Global AI-related debt issuance reached $687 billion by early November, while excess liquidity is contracting and earnings upgrade momentum is slowing. Goldman estimates AI investment accounted for about two-thirds of U.S. real GDP growth in the third quarter. If financing conditions tighten, the most heavily indebted players will be hit first, with potential shocks extending well beyond the tech sector.

Deutsche Bank strategist George Saravelos has issued similar warnings, noting that of the more than $20 trillion in U.S. equities held by foreigners, about 90% reflects price appreciation rather than actual purchases, and overall hedging ratios are very low. A structural shift higher in hedging ratios alone could substantially pressure the dollar without large capital outflows.

2027 FX Landscape: Winners and Losers

Goldman’s 2027 total return rankings revolve around four themes: commodity-sensitive currencies rebounding as energy prices normalize, AI spillovers continuing to Asian currencies, carry returns narrowing but remaining positive, and the yen gaining sustainable policy support. High-yielders like the Brazilian real (about 15%) and South African rand (about 10%) top the expected return rankings, while the Israeli shekel, Norwegian krone, and the dollar itself lag.

The bank acknowledges that overall FX return potential is “relatively limited,” but with implied volatility at historic lows, it sees “using cheap options to hedge tail risks” as highly cost-effective—whether the dollar strengthens more than expected or falls faster, current volatility pricing does not fully reflect either scenario.

Key Takeaways for Investors

• The dollar is now an AI proxy: Its fate is tied to AI capex expectations; a peak in AI enthusiasm could mark a dollar top.
• Near-term dollar strength, long-term weakness: Fed hawkishness and inflation may support the dollar in coming months, but Goldman sees a reversal in 2027.
• Watch hedging ratios: A rise in hedging ratios could pressure the dollar without capital outflows, given low current levels.
• Yen as a hedge: The yen is significantly undervalued and may benefit from BOJ normalization and AI-related risk-off moves.
• AI debt risks: Rising AI-related debt issuance and tightening liquidity pose risks beyond tech, with potential spillovers to the dollar.