George Saravelos of Deutsche Bank has been raising worries about the U.S. dollar for a while, and now he’s getting much more serious.
The Deutsche Bank strategist cautioned in early March that the dollar would lose its standing as a safe-haven currency due to a weakening correlation between the currency and stocks, just as some traders were preparing for a temporary inflation shock from U.S.-imposed tariffs. Saravelos then warned of a crisis of trust in the greenback three weeks ago.
He and fellow strategist Tim Baker are now presenting a longer-term argument that focuses on the harm to the United States’ reputation that has already been done and is probably going to be tough to reverse in the near future.
The biggest change in U.S. trade policy in a century and the biggest reevaluation of U.S. global leadership since World War II are among the numerous challenges that have surfaced since the beginning of this year, according to a note issued Thursday by Saravelos and Baker.
“Our view on all these factors is that the preconditions are now in place for the beginning of a major dollar downtrend,” they stated.
Investors seemed to be taking a break from the volatility caused by tariffs for the time being and placing their bets on a so-called Trump put, which would allow President Donald Trump to continue to supplant his trade policy positions in order to help financial markets. U.S. government debt increased on Thursday due to widespread demand for Treasurys, and all three of the country’s major stock indexes, the DJIA SPX COMP, ended the day higher for the third consecutive session.
In the meantime, the dollar kept losing ground to its main rivals. The dollar’s year-to-date slide has now reached 8% as the ICE U.S. Dollar Index DXY, which measures the currency against a basket of six competitors, dropped 0.6% to a three-year low of 99.27. According to a timeframe published two days ago by Treasury Secretary Scott Bessent, any comprehensive trade agreement between the United States and China might take two or three years to complete, which could contribute to the currency’s issues.
“Our forecasts foresee the end of a ‘higher for longer’ dollar, with EUR/USD (EURUSD) appreciating closer to purchasing-power parity of 1.30 over the remainder of the decade,” the Deutsche Bank paper asserted. Since 2014, the two have not performed at that level.
The notion that the rest of the world is less inclined to contribute to the expanding twin deficits of the United States is one of the underlying assumptions of the bear-market view of the dollar. “In a world of extreme uncertainty and rapidly shifting policy norms, the risk of market dislocations and regime breaks remains high,” the authors said.
