(Bloomberg) — The dollar is at risk of a confidence crisis if President Donald Trump’s trade war leads investors to dump US assets accumulated over the past decade, according to Deutsche Bank AG.
“We are in the midst of dramatic regime change in markets,” George Saravelos, the bank’s global head of FX strategy, wrote in a note to clients. “Given the dramatic nature of the moves, we are becoming increasingly concerned that the dollar is at risk of a broader confidence crisis.”
Saravelos’s comments follow a plunge in the greenback in the wake of US President Donald Trump’s trade tariffs unveiled Wednesday. Fears that heightened global trade tensions will hit an already wobbly US economy have boosted bets on further interest-rate cuts from the Federal Reserve and put the Bloomberg US dollar index on track for its worst day since 2022.
Deutsche Bank says further dollar declines combined with a drop in US equities and a rise in term premium in US Treasuries would be the “strongest market signal” that a process of US disinvestment is accelerating. While the latter has yet to emerge, “it would be a very negative signal if it did,” he added.
The bank issued a similar warning last month, when it said the greenback may lose its traditional safe-haven status as global markets adjust to a new geopolitical order.
“Our overall message is that there is a risk that major shifts in capital flow allocations take over from currency fundamentals and that FX moves become disorderly,” Saravelos wrote.
He also added the dollar rout increases the chance that the European Central Bank will cut interest rates in April, a probability priced by broader markets at about 90%, based on overnight interest-rate swaps. That compares to about 70% on Wednesday.
“The last thing the ECB wants is an externally imposed disinflationary shock from a loss in dollar confidence and a sharp appreciation in the euro on top of tariffs. Expect pushback,” Saravelos wrote. The euro rose more than 2% on Thursday, and was set for its best day since 2015.
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