Deutsche Bank: Three main pillars loosen, the US dollar enters a downward trend.

Deutsche Bank has sent a clear signal in its latest outlook report: the three cyclical pillars supporting the value of the US dollar - yield advantage, growth exceptionalism, and international balance dynamics - are all loosening. This suggests that the US dollar is gradually entering a downward trend. This shift is crucial for the foreign exchange market, global asset allocation, and cross-border investment returns. Investors need to be wary of the long-term risks of a weakening US dollar and reassess their exposure to the dollar and hedging strategies in their asset portfolios. The report clearly indicates that while the US dollar's "dominance" may be difficult to shake in the short term, its "value" has shown a clear downward trend. Pillar One: The high yield advantage is disappearing Historically, the US dollar's status as a high-yield currency has been a key support for its strength. According to Deutsche Bank data, the US dollar has never experienced a bear market when ranked among the top three high-yield currencies in the G10 currencies. This has been one of the key factors supporting the US dollar exchange rate in recent years. However, this core pillar is now crumbling. According to market pricing of G10 central bank interest rates, the US dollar's yield ranking is facing a significant decline. The report charts show that the US dollar's interest rate ranking among G10 currencies is expected to gradually decline from its highest position in "last year" and "now" to a middle position by the end of 2026 and 2027. At the same time, currencies like the pound, the Australian dollar, and the Norwegian krone are expected to surpass the US dollar in yield ranking. Since the Federal Reserve's monetary policy is the main driver of significant fluctuations in the US dollar, the loss of its relative yield advantage removes a key cornerstone supporting the value of the US dollar. Pillar Two: The end of US growth exceptionalism In recent years, the superior growth performance of the US economy compared to other major economies, known as the "US exceptionalism," has been another strong driver attracting capital inflows and boosting the US dollar. However, this trend is also reversing. The report points out that in the past two decades, a strong US dollar has often been accompanied by stronger growth in the US relative to other G20 economies, and this "US exception" is often not because the US itself is particularly fast, but because global impacts on other regions have been more damaging (such as the Eurozone crisis, pandemics, Russia-Ukraine conflict). Therefore, whenever the world faces trouble and other countries falter, the US appears relatively stronger, and the US dollar rises. In short, the strength of the US dollar comes more from "others being worse" rather than "the US being too strong." Furthermore, from a fiscal policy perspective, global trends are also changing. Data shows that from 2024 to 2026, the US fiscal stance will tighten, while the fiscal policies of regions like the Eurozone and the UK will be more stimulative. This pattern of "more proactive global fiscal policy and relatively conservative US policy" will further weaken the US economy's relative growth advantage, putting pressure on the US dollar. Pillar Three: International balance imbalances and changes in hedging behavior The US international balance position has been a longstanding structural weakness. The report emphasizes that the current account deficit is a continuous vulnerability for the US dollar. Historical data reveals a grim rule: whenever the US current account deficit as a percentage of GDP exceeds 4%, the US dollar weakens without exception. The report's charts suggest that the US is currently near this dangerous zone. Of greater concern is the structural changes in capital flows. Since 2020, the main drivers of the US dollar's trend have shifted from traditional international balance fundamentals to hedging behavior and other financial flows. Data shows that the behavior of foreign investors in purchasing US assets has undergone a fundamental shift. The inflow of foreign ETF funds into US assets with "unhedged" funds has continued to decline, while the inflow of "hedged" funds has steadily increased. This means that while overseas investors are still buying US assets, they are increasingly inclined to hedge against the risk of US dollar depreciation. This "de-dollarization" hedging behavior in itself constitutes downward pressure on the US dollar, reflecting the market's pessimistic expectations for the future movement of the US dollar. This article is reprinted from "Wall Street News", GMTEight Editor: Jiang Yuanhua.