Dollar to weaken, here’s what to do: Goldman Sachs

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The U.S. dollar has been on a tear thanks to strong domestic growth coupled with decelerating global economic growth, Fed tightening and escalating trade tensions, according to Goldman Sachs.

The trade-weighted U.S. dollar, which measures of the value of the American greenback relative other world currencies, has appreciated 7 percent since January, but the bank’s foreign currency experts expect a retreat over the next 12 months.

Goldman’s research identifies which investments perform best when the dollar depreciates.

“Exchange rates are often a reﬂection of underlying economic conditions rather than a direct driver of stock returns, but historical patterns of equity performance alongside sharp dollar moves can provide insight into how investors should position portfolios based on their view of the forward path of the USD,” the bank said in a note.

Goldman’s foreign exchange economists expect the trade-weighted U.S. dollar will weaken by 7 percent during the next 12 months.

The investment bank’s analysts noted that when the U.S. dollar weakens, investors should favor ﬁrms with a larger share of revenues generated abroad, while there are certain sectors that perform better than others.

The best performing sectors in a weakening U.S. dollar environment, ranked in order, are information technology, materials, health care, utilities and telecom services. These sectors’ returns have all beat the S&P 500. Consumer staples, energy, industrials, financials and consumer discretionary have all lagged.

*In its analysis Goldman assessed the one month median return of sectors when the trade-weighted U.S. dollar fell by 2 percent. The data included 60 months, going back to 1980.