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By Saeed Azhar and Davide Barbuscia
NEW YORK (Reuters) -Foreign investor appetite for U.S. dollar assets may wane unless the currency depreciates further, said Goldman Sachs' chief economist, cautioning that a downward trajectory is expected even in the absence of a meaningful economic slowdown.
"The dollar is still very highly valued ... I expect foreign investors to be less willing to keep adding to the U.S. share on their portfolios," said Jan Hatzius in an interview.
Hatzius said that while the U.S. retains key advantages, such as higher productivity trends compared to Europe, the country's relative performance is beginning to erode, and that will likely show up most clearly in the currency markets.
The U.S. runs a current account deficit of more than a trillion dollars, which means the country relies on foreign demand to fund its trade deficit, Hatzius said.
But with the U.S. asset share of foreign investor portfolios already at high levels, it will be difficult to sustain funding needs without a dollar depreciation, he said.
The dollar index is down about 9% since the inauguration of U.S. President Donald Trump as the administration's plans to impose tariffs on U.S. trading partners have rattled investors and hurt financial markets.
The possibility of the U.S economy contracting has gained traction in the market in recent months on the back of Trump's protectionist policies, but Hatzius said the dollar is expected to slide even without a U.S. recession.
"If the economy slows by more, and the (Federal Reserve) cuts interest rates by more, that would add to the case ... but I'm not building the case for dollar depreciation on a recession forecast or very aggressive rate cuts, I think you'll get dollar depreciation even if the rate cuts are relatively moderate."
Hatzius said the Fed could have been in a position to cut interest rates as soon as next week, when its rate-setting meeting takes place, had the U.S. central bank not been constrained by the inflationary impact of tariffs.
"If it wasn't for the fact that this negative growth shock is occurring alongside a positive inflation shock, they'd (Fed) already be thinking about cutting," said Hatzius.
Fed officials last week raised the possibility the U.S. central bank may be open to lowering interest rates in coming months if the inflationary impact from tariffs is temporary.
Those remarks came after a speech by Fed Chair Jerome Powell earlier this month that had left investors worried that the central bank would be reluctant to cut rates. That speech also led to an escalation of Trump's criticism towards Powell for not lowering rates, even though Trump subsequently said he had no intention of removing Powell from his position.