Deutsche Bank sounded the alarm for the third time: the U.S. dollar has the prerequisites to start a sharp drop

Source: Jinshi Data

George Saravelos, global head of foreign exchange research at Deutsche Bank, has been sounding the alarm about the dollar for some time, and now he has taken those concerns to a new level.

In early March, just as some traders were preparing for a possible short-term inflationary shock from U.S. tariffs, the Deutsche Bank strategist warned that the dollar could lose its reputation as a safe-haven currency, citing a decline in the correlation between the dollar and stocks. Then, three weeks ago, Saravelos pointed out the risk of a crisis of confidence in the dollar.

Now, he and fellow strategist Tim Baker have made a longer-term prediction that boils down to the fact that the United States' reputation has been damaged, and that damage may be difficult to repair quickly. In a report published Thursday, Saraveros and Baker listed a long list of obstacles the dollar has faced since the start of the year, including the biggest U.S. trade policy shift in a century and the most significant reassessment of U.S. geopolitical leadership since World War II. "Our view on all of these factors is that the prerequisites are now in place for the dollar to embark on a significant downward trend," they wrote. For now, investors appear to be taking a breather from the volatility caused by tariffs and pinning their hopes on the so-called "Trump put," that Trump can continue to soften his trade policy stance, to support financial markets. On Thursday, the three major U.S. stock indexes closed higher for the third consecutive trading day, while U.S. government bond prices rose on broad demand for U.S. Treasuries. The dollar continued to weaken against other major currencies. The Intercontinental Exchange (ICE) Dollar Index, which measures the dollar against six major currencies, fell 0.6% to 99.27 on Thursday, a three-year low, and has fallen nearly 8% so far this year. Part of the problem for the dollar may be that any comprehensive trade deal between the U.S. and China could take two to three years, based on a timeline given two days ago by U.S. Treasury Secretary Scott Bessent.

“Our forecast is that the era of the ‘long run higher’ for the dollar will end, with the euro appreciating against the dollar over the rest of the decade, closer to a PPP exchange rate of 1.30,” the Deutsche Bank report said.The euro has not traded at that level against the dollar since 2014.

Behind the bearish dollar view, in part, the bank’s strategists are thinking that the rest of the world is less willing to finance America’s widening twin deficits.“In a world of deep uncertainty and rapidly changing policy norms, the risk of market disruptions and rule-breaking remains high,” Saravelos and Baker wrote.