Is the dollar crisis after tariffs? Deutsche Bank: We are at the center of a dramatic market transformation

After Trump announced a new round of tariff plans, the dollar experienced a sharp decline, and investors began to worry that this could lead to a broader crisis of confidence.

George Saravelos, the global foreign exchange research head at Deutsche Bank, warned before Trump announced the tariff policy that the broader the scope of the tariffs, the greater the negative impact on the U.S. itself. U.S. asset risks, the probability of economic recession, and the dollar would all be hit.

On the 3rd, Saravelos further stated that the breakdown of the correlation between the dollar and U.S. risk assets is concerning—European losses on U.S. assets have now exceeded those during the 2022-2023 crisis. The dollar's safe-haven properties are being eroded, which brings significant costs to unhedged dollar holdings.

“All of this could lead to a self-fulfilling reversal of capital flows, meaning a withdrawal of investments from countries that have been exporting capital to the U.S. over the past decade (most developed countries).”

The Dollar Faces a Crisis of Confidence Risk

Ultimately, the U.S. has a large current account deficit, and the stability of this currency relies on capital inflows. Deutsche Bank believes that if the dollar falls, U.S. stock markets decline, and the term premium on U.S. Treasuries rises, it will be the strongest market signal for an accelerated withdrawal of investments from the U.S.

The term premium on U.S. Treasuries has not yet realized an increase, but if this occurs, it would be a very negative signal.

Deutsche Bank warns that there is a risk of a significant shift in capital flow allocation beyond currency fundamentals, and foreign exchange trends could become disorderly.

If the dollar's decline accelerates, it would be a development that central banks around the world would very much dislike. The European Central Bank is most concerned about external deflationary shocks and a significant appreciation of the euro caused not only by tariffs but also by a loss of confidence in the dollar.

Analysts believe that the widespread sell-off in global markets indicates that investors do not expect there to be winners in the escalating trade war. But it also suggests that the U.S. itself may be one of the biggest victims of Trump's protectionist policies.

“Global asset allocators will view the U.S. in a completely different light,” said Neil Birrell, Chief Investment Officer at Premier Miton Investors, on a call. “Will international investors sell U.S. assets and shift funds as a result? Yes, they very likely will.”

As of the time of publication, the dollar index has fallen 2% to 101.62.

We are in the midst of a dramatic change in market systems, and investors should remain vigilant