The long-term bear market in the US dollar has arrived! Deutsche Bank: This has a profound impact on the global economy and capital flows

Source: Wall Street Insights

Is a long bear market for the US dollar about to begin?

On the 23rd, the research team led by Tim Baker of Deutsche Bank released a research report pointing out that since the beginning of the year, a series of major changes have occurred globally, including the shift in US trade policies, the adjustment of Germany's fiscal policies, and the reevaluation of the US's geopolitical leadership. These events are challenging the foundation of the global financial system since World War II and jointly contributing to the preconditions for the US dollar to enter a downward cycle.

Deutsche Bank believes that the core reasons include the global decline in the willingness to finance the US's twin deficits, the peak of US asset holdings, and the preference of many countries for domestic fiscal policies to promote growth.

The report predicts that the euro/dollar exchange rate will reach 1.15 by the end of 2025, rise to 1.20 in 2026, and then gradually approach 1.30. The US dollar will end the era of "high interest rates", which will have a profound impact on the global economy and capital flows.

The Core of the US Dollar Bear Market: The Global Decline in the Willingness to Finance the US's "Twin Deficits"

Deutsche Bank believes that the bull market of the US dollar has come to an end, indicating the beginning of a long bear market.

Since the beginning of 2025, the performance of the US dollar index has shown a clear turning point, gradually moving from a long-term strength to an adjustment. The reasons are concentrated in three core judgments:

The global decline in the willingness to finance the US's "twin deficits": The current account deficit has risen to more than 4% of GDP. This structural flaw means that the support for the future appreciation of the US dollar has weakened.

The peak and gradual decrease of US asset holdings: The appreciation of the US dollar was accompanied by the high level of US asset (bonds and stocks) holdings. There have been signs of gradually reducing positions, and the international capital's demand for the US dollar has weakened.

Other countries' preference for using domestic fiscal space to support growth: In countries other than the US, governments are more willing to use their fiscal space to support economic growth and consumption.

Outlook for the US Dollar Path: Exchange Rate Expectations and Potential Risks

Deutsche Bank stated that the aggressive tariff policy of the US is the main negative catalyst facing the US dollar. Different from the trade policies in 2018-19, the current trade policy is accompanied by greater uncertainty and is harming rather than helping the US economic growth.

In response to US policies, other countries are actively adopting fiscal easing policies to stimulate domestic demand. Especially the euro zone, which has long relied on export-driven growth, may increase its fiscal support. Deutsche Bank said that Germany's fiscal stimulus is an example. It is expected to make Germany's deficit exceed 3% of GDP and drive the economic growth to reach 2%.

Deutsche Bank expects that the US dollar will continue to weaken in the coming years. For the euro/dollar, the report predicts that it will reach 1.30 by the end of 2028. And it provides the following forecast data for G10 currencies:

In Multiple Scenarios, the Key Lies in the Combination of Trade and Fiscal Policies

The report proposes several possible scenarios and points out that the relative fiscal policies of the US and other countries, as well as the ongoing trade policies, are the key driving factors of the US dollar cycle.

Base Case: The US gradually abandons its extreme tariff policy, the US moderately tightens its fiscal policy, other countries moderately loosen their fiscal policies, and the Federal Reserve restarts the interest rate cut cycle. However, the US dollar will decline at a relatively slow speed, and the euro/dollar will be between 1.15 and 1.20 at the end of the year.

Severe US Dollar Bear Market: The US resumes its tariff policy and significantly tightens its fiscal policy next year, while other countries significantly increase their fiscal support. This may lead to a recession in the US economy, the Federal Reserve significantly cuts interest rates, and the euro/dollar rises above 1.20.

US Dollar Strength: The US exerts pressure on some countries. At the same time, trade barriers are established among other countries, and the US turns to fiscal easing, then the US dollar strengthens.

The report emphasizes that there may be risks of non-linear reactions and institutional breakthroughs in the market, especially that the independence of the Federal Reserve may be challenged.

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