Is the pattern set? The US dollar is heading towards long-term depreciation!
Deutsche Bank AG stated that the current extreme valuations and positions make the US dollar particularly vulnerable to shocks. Data shows that the dollar has been overvalued by more than 20% relative to purchasing power parity (PPP) for three consecutive years, which is unprecedented in history. The valuation of US stocks compared to other global markets has also reached historical highs, with a price-to-earnings ratio premium of up to 60% a few months ago
Multiple extreme factors accumulate, and the US dollar is likely to face long-term depreciation!
According to news from the Chase Wind Trading Desk, Deutsche Bank stated in its latest research report that after the market experienced a six-week period of turbulence, despite a more moderate outlook on tariffs, the long-term bearish stance on the US dollar remains unchanged.
The report pointed out that recent policy and market fluctuations may have been concerning enough to prompt investors to reconsider their investments in the US. This, in itself, is not a major issue for the dollar, but the current extreme valuations and positions make the dollar particularly vulnerable to shocks.
In addition, Deutsche Bank noted that changes in fiscal policy could lead to an expansion in Germany's bond issuance, altering the dominant position of US Treasuries as global safe assets. This is also unfavorable for the dollar's performance.
Extreme valuations, positions, and changes in fiscal policy = Long-term depreciation of the dollar
The report indicated that the dollar's valuation is at historically extreme levels. Data shows that the dollar has been overvalued by more than 20% relative to purchasing power parity (PPP) for three consecutive years, which is unprecedented in history.
At the same time, the US current account deficit is widening, further exacerbating concerns about the dollar's overvaluation.
The report also emphasized that US stock valuations have reached historical highs compared to other global markets, with a price-to-earnings ratio premium of up to 60% a few months ago.
Data also shows that foreign investors' holdings of US stocks have exceeded historical averages.
Finally, Deutsche Bank's research indicates that due to the large scale of US bond issuance and the quantitative easing (QE) being less than that of the European Central Bank, the US has provided a supply of safe government bonds far exceeding that of the Eurozone, in fact more than three times that of the Eurozone.
This provides global investors with more options for safe assets. However, the report pointed out that Germany's future bond issuance may expand, which will change the relative dominance of US Treasuries in the global safe asset market.
Deutsche Bank stated that the dollar's extreme valuation, combined with multiple factors such as global capital repositioning and changes in fiscal conditions, indicates that the dollar is facing multiple downward pressures, making long-term depreciation trends difficult to avoid.
Although Deutsche Bank believes the dollar will trend towards long-term depreciation, in the short term, the dollar's performance faces a tug-of-war from multiple forces. The report stated,
On one hand, investment funds may flow back to the US from other safe-haven currencies (such as the euro, yen, and Swiss franc), supporting a stronger dollar; on the other hand, a rebound in risk appetite may benefit undervalued risk currencies, such as the Australian dollar and Norwegian krone
