The dollar is bleeding. Rob Kaplan knows the cost. The Vice Chairman of Goldman Sachs stood before the APAC Global Macro Conference today with a warning that defied the usual export-led optimism. He questioned the fundamental premise of the current administration’s trade strategy. A weaker currency is often sold as a panacea for domestic manufacturers. This is a lie. It is a short-term sedative that masks long-term structural decay. Kaplan pointed to the immediate friction in the Pacific. Japanese rate volatility is no longer a localized tremor. It is a global earthquake.
The Export Myth and the J-Curve Reality
Currency devaluation is a race to the bottom. Proponents argue that a cheaper dollar makes American goods more competitive abroad. This ignores the reality of global supply chains. Most American exports rely on imported raw materials. When the dollar falls, the cost of production rises. This creates the J-Curve effect. Initially, the trade balance worsens because the cost of imports rises faster than the volume of exports can adjust. Only much later does the balance improve, if at all. Kaplan’s skepticism is rooted in the current inflationary environment. We are not in the 1980s. The global economy is too tightly coupled for simple devaluation to work without triggering a massive spike in imported inflation.
The Federal Reserve finds itself trapped. If they allow the dollar to slide to appease trade hawks, they risk reigniting the consumer price index. According to recent reports from Reuters, the market is already pricing in a defensive posture from the FOMC. The central bank cannot afford a currency rout while labor markets remain this tight. Kaplan noted that the outlook for US monetary policy must remain anchored in price stability, not trade engineering. Any deviation leads to a loss of the dollar’s status as the ultimate store of value.
The Japanese Volatility Engine
Tokyo is the epicenter of the current storm. The Bank of Japan has finally abandoned its decades-long experiment with ultra-easy money. The result is chaos. Japanese rate volatility has spiked to levels not seen in years, forcing a massive unwinding of the yen carry trade. For years, investors borrowed yen at near-zero rates to buy higher-yielding US Treasuries. That trade is now toxic. As the yen strengthens and Japanese yields rise, the forced liquidation of US assets is putting upward pressure on American borrowing costs. This is the feedback loop Kaplan warned about. You cannot decouple US monetary policy from the erratic movements of the Nikkei and the JGB market.
Market Volatility Data Analysis
The following table illustrates the currency shifts observed in the 48 hours leading up to Kaplan’s address. The data reflects a market in a state of high anxiety.
| Currency Pair | January 27 Rate | January 29 Rate | % Change | Volatility Index |
|---|---|---|---|---|
| USD/JPY | 138.45 | 142.10 | +2.63% | High |
| EUR/USD | 1.1020 | 1.0850 | -1.54% | Moderate |
| GBP/USD | 1.2750 | 1.2610 | -1.09% | Moderate |
| AUD/USD | 0.6650 | 0.6520 | -1.95% | High |
The volatility is not a bug. It is a feature of the transition. The global financial system is re-pricing risk in real-time. The Goldman Sachs Global Macro Conference has become a theater for this realization. Investors are beginning to understand that the era of predictable, low-volatility currency regimes is over. The technical breakdown of the USD/JPY pair suggests that the 145 level is the next psychological barrier. If that breaks, the carry trade unwinding will accelerate into a full-blown liquidity event.
Visualizing the Currency Shift
The chart below tracks the intraday volatility of the USD/JPY pair leading into the conference. The sharp spikes correspond with the Bank of Japan’s most recent policy communications.
USD to JPY Intraday Volatility Jan 27-29
The Geopolitical Gamble
Kaplan’s analysis suggests a deeper geopolitical play. The US is attempting to maintain its technological lead while simultaneously re-shoring industrial capacity. This requires capital. A weak dollar makes US assets cheaper for foreign buyers, but it also makes the cost of that capital more expensive. Per analysis from Bloomberg, the yield on the 10-year Treasury has already begun to creep upward in anticipation of a less stable dollar. This is the paradox. You cannot have a manufacturing renaissance fueled by cheap exports if the cost of the debt required to build the factories becomes prohibitive.
The volatility in Japanese rates is the variable that the Fed cannot control. For years, the BoJ was the world’s lender of last resort. Now, they are sucking liquidity back into Tokyo. This creates a vacuum in the Eurodollar market. Kaplan noted that the implications for US monetary policy are profound. The Fed may be forced to provide liquidity to the repo markets even as it tries to maintain a restrictive stance to fight inflation. This ‘dual-track’ policy is fraught with danger. It risks confusing the market and undermining the credibility of the central bank’s inflation target.
The Next Milestone
The market is now fixated on the upcoming FOMC meeting scheduled for early February. Traders are looking for any sign that the Fed will acknowledge the spillover effects from the Bank of Japan. The key data point to watch is the 10-year Treasury yield. If it breaches the 4.8% mark before February 15, expect a sharp correction in equities as the ‘higher for longer’ narrative collides with the reality of a shrinking global liquidity pool. Kaplan has laid out the map. The question is whether the market is willing to follow it or if it will continue to chase the mirage of a weak-dollar recovery.
