"Frowning finance" replaces the "smile theory"! Deutsche Bank warns that the US dollar faces depreciation risks.

The global foreign exchange strategist George Saravelos of Deutsche Bank stated that regardless of whether the US is facing a financial crisis or an economic recession, the dollar faces the risk of depreciation. In a report, George Saravelos pointed out, "Describing the current situation as 'frowning dollar' is most fitting." This statement is a derivation of Stephen Jen's "dollar smile" theory proposed over 20 years ago. George Saravelos stated that the upcoming budget negotiations will determine the position of the dollar on this curve. He said, "The extreme situation on the left side is a fiscal stance that is too loose, which would lead to both a decline in US Treasuries and the dollar - as we saw again this morning." "On the other extreme on the right side is a too rapid fiscal tightening, which although able to quickly narrow the deficit, would force the US into a recession, ushering into a deep easing cycle by the Federal Reserve." He added that a middle road, known as a "soft landing," would be more favorable for the dollar. After Moody's downgraded the US sovereign credit rating, the 30-year US Treasury bond yields rose to the highest level since November 2023 on Monday. At the same time, the US dollar index fell by 0.7%, and the dollar weakened against all G10 currencies. George Saravelos stated that if this pattern continues, it would indicate that the market's interest in financing the US deficit is diminishing, and financial stability risks are on the rise. Before the outbreak of the trade war this year, the market usually followed the "dollar smile" theory - the dollar strengthens during periods of strong economic growth or deep recession. However, President Trump's tariff policies disrupted this pattern. These policies suppressed global growth expectations, weakened the attractiveness of the dollar as a safe haven, and undermined the "American exceptionalism." Data shows that the Bloomberg dollar spot index has fallen by over 6% so far this year. It is worth noting that Goldman Sachs research department also predicts that as trade tensions, policy uncertainty, and slowing US economic growth put pressure on investor confidence and foreign demand for US assets, the dollar will face depreciation. Goldman Sachs stated, "The weakening of the dollar against major currencies is expected to continue in the first quarter of 2025." "We have previously pointed out that US assets have excellent return prospects, which is the fundamental reason for the strong valuation of the dollar. However, if tariffs squeeze US corporate profit margins and lower real incomes of US households, this 'American exceptionalism' may be eroded." Goldman predicts a 10% decline in the dollar against the euro, and 9% declines against the yen and pound. Goldman stated that as "foreign consumers resist American products" and inbound tourism decreases after tariff announcements, market sentiment towards US assets is deteriorating, which is exerting a slight but continued drag on GDP. The bank said, "Foreign spending plans far exceed expectations, while the performance of US assets is relatively weak, and this combination has already led to some short-term but active capital withdrawal from US assets." Furthermore, foreign central banks are reducing their dependence on the dollar, and Goldman warns that private investors may soon follow suit: "If policy disruptions continue and 'American exceptionalism' continues to be damaged, private investors may take similar actions." Goldman points out that the current tariffs are "broad and unilateral," which may shift more economic burden onto the US. The bank stated, "US companies and consumers have become price takers... If the supply chain or consumers lack elasticity in the short term, the result may be dollar depreciation."