Is a long bear market for the US dollar about to begin?
On the 23rd, the Deutsche Bank Tim Baker team released a research report indicating that since the beginning of the year, a series of significant changes have occurred globally, including shifts in US trade policy, adjustments in German fiscal policy, and a reassessment of the US's geopolitical leadership. These events are challenging the foundations of the global financial system that have existed since World War II, jointly creating the preconditions for the US dollar to enter a downward cycle.
Deutsche Bank believes that the core reasons include a declining willingness to finance the US's twin deficits, a peak in US asset holdings, and a preference among multiple countries for domestic fiscal measures to promote growth.
The report predicts that the euro/USD exchange rate will reach 1.15 by the end of 2025, rise to 1.20 in 2026, and then gradually approach 1.30. The dollar will end the &#34;high interest rate&#34; era, which will have profound effects on the global economy and capital flows.
<h2>Core of the Dollar Bear Market: Global Willingness to Finance US &#34;Twin Deficits&#34; Declines</h2>
Deutsche Bank believes that the bull market for the dollar has come to an end, signaling the start of a long bear market.
Since the beginning of 2025, the performance of the dollar index has shown a clear turning point, gradually shifting from a long period of strength to adjustment. The reasons focus on three core judgments:
<blockquote>
<ul>
<li>Declining global willingness to finance the US's &#34;twin deficits&#34;: The current account deficit has risen to over 4% of GDP. This structural flaw means that the support for future dollar appreciation is weakening.</li>
<li>Peak and gradual reduction of US asset holdings: The appreciation of the dollar has coincided with high levels of US asset (bonds and stocks) holdings, which have shown signs of gradual reduction, leading to weakened international demand for the dollar.</li>
<li>Other countries prefer to use domestic fiscal space to support growth: In countries outside the US, governments are more willing to use their fiscal space to support economic growth and consumption.</li>
</ul>
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/3ea6921f-89fa-401e-9839-409aa82a9c78.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/3ea6921f-89fa-401e-9839-409aa82a9c78.png"/>
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<h2>Outlook for the Dollar Path: Exchange Rate Expectations and Potential Risks</h2>
Deutsche Bank stated that the US's aggressive tariff policies are the main negative catalysts facing the dollar. Unlike the trade policies of 2018-19, the current trade policies come with greater uncertainty and are harming rather than helping US economic growth.
In response to US policies, other countries are actively adopting fiscal easing measures to stimulate domestic demand. Particularly in the eurozone, which has long relied on export-driven growth, there may be an increase in fiscal support. Deutsche Bank noted that Germany's fiscal stimulus is an example, expected to push Germany's deficit above 3% of GDP and drive economic growth to 2%.
Deutsche Bank expects that the dollar will continue to weaken in the coming years, predicting that the euro/USD will reach 1.30 by the end of 2028. It also provides the following forecast data for G10 currencies:
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/3f940a99-bece-4141-a467-21534d532f6f.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/3f940a99-bece-4141-a467-21534d532f6f.png"/>
<h2>In Various Scenarios, the Key Lies in the Combination of Trade and Fiscal Policies</h2>
The report presents several possible scenarios and points out that the relative fiscal policies of the United States and other countries, along with ongoing trade policies, are key drivers of the dollar cycle.
<blockquote>
<ul>
<li>Base Case: The United States gradually abandons extreme tariff policies, moderately tightens fiscal policy, other countries adopt moderately loose fiscal policies, and the Federal Reserve resumes the interest rate cut cycle, but the pace of the dollar's decline will be relatively slow, with the euro/dollar expected to be between 1.15 and 1.20 by the end of the year.</li>
<li>Severe Bear Market for the Dollar: The United States reinstates tariff policies and significantly tightens fiscal policy next year, while other countries greatly increase fiscal support. This could lead to a recession in the U.S. economy, with the Federal Reserve cutting interest rates significantly, and the euro/dollar rising above 1.20.</li>
<li>Strong Dollar: The United States exerts pressure on certain countries while establishing trade barriers among other countries, and if the U.S. shifts to fiscal easing, the dollar will strengthen.</li>
</ul>
</blockquote>
The report emphasizes that there may be risks of non-linear responses and institutional breakthroughs in the market, particularly the independence of the Federal Reserve may be challenged

Deutsche Bank believes that the dollar bull market has ended and a bear market has begun, with core reasons including a decline in global willingness to finance the U.S. twin deficits, a peak in U.S. asset holdings, and a preference among many countries for domestic fiscal measures to promote growth. The euro/dollar exchange rate is expected to reach 1.15 by the end of 2025, gradually approaching 1.30 thereafter

- Deutsche Bank's Tim Baker team suggests that a prolonged bear market for the U.S. dollar may be beginning, driven by significant global changes since the start of the year.  
- Key factors include declining global willingness to finance the U.S. twin deficits, a peak in U.S. asset holdings, and other countries favoring domestic fiscal measures for growth.  
- The report predicts the euro/dollar exchange rate will reach 1.15 by the end of 2025 and 1.30 by 2028, indicating a shift away from the era of high U.S. interest rates, which will impact global economics and capital flows.

The long-term bear market for the US dollar has arrived! Deutsche Bank: This will have a profound impact on the global economy and capital flows