The dollar faces threat of losing safe haven status Deutsche Bank warns

Deutsche Bank has sounded the alarm on the potential decline of the US dollar’s long-held safe haven status. Recent developments in global markets suggest cracks are beginning to show in the currency’s historically strong position.

According to George Saravelos, the global head of FX research at Deutsche Bank, the early signs of this shift have been accelerating since the start of the year. The dollar’s weakening was particularly highlighted this week as its usual correlation with risk assets was not evident, and several key indicators pointed towards broader challenges for the greenback, including the widening US current account deficit.

In a statement, Saravelos shared that the market movements were unexpected. He noted the unusual market reaction on Tuesday, with the dollar failing to show the strength typically expected during tariff impositions. Whereas, currencies like the euro and sterling saw gains against the dollar. The Canadian dollar remained almost steady despite significant trade measures implemented by the US administration.

The commentary emphasised the unpredictability surrounding US policy under the current administration. Saravelos pointed to rising levels of policy uncertainty in America, surpassing those seen in other parts of the world. He attributed much of this to trade disruptions and a tightening fiscal environment in the wake of tariff initiatives. The American economy now faces higher tariff averages, the largest since 1970, with severe implications for global trade.

Deutsche Bank remains cautious about becoming overly bearish on the dollar just yet. Saravelos mentioned key factors tempering this viewpoint, such as the possibility of a reversal in policies that may ease the economic strain caused by fiscal missteps. However, he underscored the importance of watching for further signs of weakness in the months ahead.

The research team at Deutsche Bank also observed shifts towards greater confidence in European currencies, particularly the euro. Recent increases in defence spending across the European Union contributed to a positive reassessment of the currency’s outlook, evident in the bank dropping its long-standing negative stance on the euro last week.

As global economic dynamics continue to evolve, the US dollar’s position as the world’s safe haven currency might face further tests, particularly if contradictions within policy and trade decisions remain unresolved.