Deutsche Bank warns that European investors are facing significant investment losses as the traditional negative correlation between the dollar and the U.S. stock market is breaking down.
This year, the dollar has failed to provide a safe haven during declines in the U.S. stock market as it has in the past, prompting a reassessment of unhedged dollar assets. UBS points out that doubts about &#34;American exceptionalism&#34; are shaking global investors' confidence in U.S. assets, potentially leading to large-scale dollar sell-offs. This means that investors need to reassess the risk exposure of their portfolios and be wary of the potential risks of dollar depreciation.
<h2>The Dollar is No Longer a &#34;Safe Haven&#34;: A Painful Reality</h2>
George Saravelos, the global head of foreign exchange research at Deutsche Bank, describes the current market conditions as &#34;some painful things are happening.&#34;
Deutsche Bank has found that European investors' losses on their S&amp;P 500 holdings have reached levels seen during the 30% sell-off triggered by inflation in 2022 (Figure 1). However, unlike in the past, the dollar has failed to rebound even when the U.S. stock market declines. Instead, the dollar's weakness this year has exacerbated potential asset losses rather than providing a hedge.
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Deutsche Bank notes that the dollar's safe-haven properties have played a key role in portfolio allocation over the past decade. When &#34;bad things&#34; happen, the dollar tends to rise, making unhedged U.S. risk assets a very attractive portfolio diversification tool. But now, this pattern is changing.
<h2>The Decline of American Exceptionalism and the Dollar's Vulnerability</h2>
UBS's previous report has sounded the alarm. The bank points out that the &#34;American exceptionalism&#34; that once supported the dollar's hegemony is facing severe challenges.
China's rise in technology and artificial intelligence, declining expectations for U.S. economic growth (affected by trade frictions and tightening fiscal policies), and hopes for accelerated fiscal spending and growth driven by Europe's ambitious security policies are all challenging the &#34;overweight&#34; status of U.S. assets. These factors are shaking the excessive allocation to U.S. assets that has been built over the past decade.
UBS warns that approximately $14 trillion of unhedged U.S. assets are at risk. If foreign investors reduce their holdings by 5%, it could trigger $700 billion in dollar sell-offs. The dollar may face depreciation pressure due to declining confidence among foreign investors in U.S. assets, especially against the backdrop of European investors significantly increasing their holdings of U.S. stocks, with the euro potentially becoming the main rival currency to the dollar.
A report from Bank of America also shows that the gap between bearish sentiment on the dollar and investors' dollar exposure has reached levels seen in 2020, indicating that the dollar may decline further. Dollar sentiment has sharply reversed to the most pessimistic since 2021. Analyst Adarsh Sinha stated, &#34;While positions have turned bearish, they are severely lagging behind the dramatic change in sentiment.&#34;
<h2>Why is the US dollar depreciating?</h2>
Deutsche Bank believes that the weakening of the dollar can be attributed, on one hand, to the downward repricing of expectations regarding US fiscal policy, economic growth, and the Federal Reserve (Fed). On the other hand, the Trump administration's numerous challenges to the existing international order may also be undermining the dollar's safe-haven status.
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If the correlation between the US stock market and the dollar continues to break down, it will prompt European (and global) asset managers to engage in deeper discussions about diversifying returns on unhedged risk assets exposed to the dollar. Some news reports suggest that this situation may have already begun. This means that the likelihood of significantly reducing dollar exposure is increasing.
It is noteworthy that while the &#34;Mar-a-Lago Agreement,&#34; which is currently a hot topic on Wall Street, may weaken the dollar, Deutsche Bank believes that policies that undermine the dollar's economic foundation will achieve the same effect.
<h2>Funds may flow back to Europe and emerging markets</h2>
European investors are the largest holders of US stocks, holding about $4.6 trillion, followed by Canada ($2 trillion), the UK ($1.9 trillion), and Japan ($1.1 trillion). (UBS) If the European economic recovery and fiscal policy support can be sustained, these funds may pose a &#34;potential threat&#34; to the dollar.
Currently, foreign investors have a foreign exchange hedging ratio of only 20% for US stocks and 50% for fixed income. This means that most US assets are exposed and unhedged. Once market sentiment reverses, these unhedged assets may quickly trigger a dollar sell-off.
As the &#34;American exceptionalism&#34; narrative weakens, the pattern of global capital flows is changing. European investors' holdings of US stocks have significantly increased in recent years, but with the improvement in the European economic outlook and fiscal policy support, some funds may flow back to Europe. Additionally, emerging market investors are also reassessing their portfolios, with some funds potentially flowing into Asia and other emerging economies.
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The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing based on this is at one's own risk

Deutsche Bank warned that the negative correlation between the dollar and the U.S. stock market is breaking down, leading to significant losses for European investors. The dollar has failed to provide a safe haven during stock market declines, prompting a reassessment of unhedged dollar assets. UBS pointed out that global investors' confidence in U.S. assets is wavering, which could trigger a massive dollar sell-off, requiring investors to reassess portfolio risks. The safe-haven properties of the dollar are weakening, facing approximately $14 trillion in unhedged asset risk

- Deutsche Bank warns that the traditional inverse relationship between the dollar and U.S. stock markets is breaking down, leading to significant investment losses for European investors.  
- UBS highlights that skepticism towards the "American exceptionalism" is undermining global confidence in U.S. assets, potentially triggering massive dollar sell-offs.  
- As a result, investors may need to reassess their portfolio risk exposure and remain cautious of potential dollar depreciation, especially with increasing European investments in U.S. stocks.

When the US dollar is no longer a "safe haven"!