Deutsche Bank Warns: The US Dollar Faces a Confidence Crisis and Risks Structural Decline

Deutsche Bank recently warned that the US dollar exchange rate will enter a structural downward trend in the coming years, which will push the dollar against the euro to its lowest level in more than a decade.

Recently, the US has arbitrarily wielded the "tariff stick," raising concerns among investors about the loss of global trust in US assets, and the dollar has also faced an unusual wave of selling. Deutsche Bank pointed out that trade conflicts have already harmed the dollar, and its safe-haven attributes are being eroded, facing a crisis of confidence.

Deutsche Bank strategists George Saravelos and Tim Baker stated that the negative impact of US tariff policies, combined with Germany's fiscal stimulus and the reassessment of the US role on the global stage, will lead investors to sell US assets and drag the dollar lower.

Earlier this week, the US dollar index fell to a three-year low, briefly breaking below the 98 mark. The reason was the increased uncertainty in US policies, which raised doubts about the dollar's status as the world's reserve currency.

Deutsche Bank strategists wrote in the report, "The prerequisites for a significant downward trend in the dollar are in place, and given the historic developments over the past few months, we now expect the dollar to enter a prolonged decline cycle."

Deutsche Bank now expects the euro to rise to 1.30 against the dollar by the end of 2027, a level not seen since 2014 and well above the survey's median forecast of 1.15.

The bank also expects the dollar to fall to 115 against the yen, the lowest level since 2022. Just a month ago, Deutsche Bank's forecast targets for the euro and yen were 1.15 and 125, respectively.

The euro will benefit from "safe-haven inflows" and foreign exchange reserve managers looking to increase investments in Europe. The euro rose nearly 5% this month and briefly touched 1.15 dollars this week. Deutsche Bank expects that by the end of 2027, the dollar will decline against other currencies, with the pound rising to 1.45 dollars against the dollar, the highest level since 2016. The dollar is expected to fall to 1.25 against the Canadian dollar, the lowest level since mid-2022.

Saravelos and Baker stated that Trump's trade policies are reducing foreign investors' willingness to fund the US "twin deficits" (fiscal deficit + current account deficit). This has led to the gradual exit of large holdings of US assets over the past few years and prompted other countries to increase fiscal spending to support domestic economic growth and consumption.

They believe this means that decades of American exceptionalism "have already begun to erode." As the market continues to move away from the dollar, extreme uncertainty and rapidly changing policy norms will keep the risk of "market chaos and rule breakdown" high.

Dollar confidence is waning.

Deutsche Bank's view aligns with that of Kamakshya Trivedi, Goldman Sachs' global head of foreign exchange, rates, and emerging markets strategy, who recently stated that the dollar has entered a sustained long-term decline phase, and foreign investors are currently reassessing the risk-return of dollar-denominated assets as US Treasuries and US stocks fall together.

Meanwhile, Goldman Sachs' chief economist Jan Hatzius also said on Thursday that the dollar still has room to fall further, and the pressure on global investors to adjust their portfolios' dollar assets will increase downward pressure on the dollar.

Barry Eichengreen, an economist at the University of California, Berkeley, claimed, "Global trust in the dollar was built over half a century or more, but it could disappear in the blink of an eye."