Deutsche Bank Warns of 20% Overvalued Dollar, Long-Term Depreciation Risks

Deutsche Bank has issued a report suggesting that the U.S. dollar is facing significant challenges that could lead to long-term depreciation. The bank highlights that despite a recent period of market volatility, the outlook for the dollar remains bearish. The report points out that while tariff prospects have become more moderate, the overall sentiment towards the dollar's future is still negative.

The report emphasizes that the current extreme valuation and positioning of the dollar make it particularly vulnerable to shocks. Data shows that the dollar has been overvalued by more than 20% relative to its purchasing power parity (PPP) for three consecutive years, a historical first. Additionally, U.S. stock valuations have reached historical highs compared to other global markets, with a price-to-earnings ratio premium of 60% just a few months ago.

Deutsche Bank also notes that the U.S. current account deficit is widening, further exacerbating concerns about the dollar's overvaluation. The report highlights that foreign investors' holdings of U.S. stocks have exceeded historical averages. Furthermore, the U.S. provides a significantly larger supply of safe government bonds compared to the eurozone, which could change as Germany's bond issuance expands in the future.

The bank's analysis suggests that the combination of extreme valuation, positioning, and changes in fiscal policy indicates that the dollar is facing multiple downward pressures. This could make a long-term depreciation trend difficult to avoid. Despite this bearish outlook, the report acknowledges that the dollar's short-term trajectory is influenced by various forces, making it subject to fluctuations.

In addition to the Deutsche Bank report, market participants are closely watching the U.S. government's stance on currency policy. Reports indicate that the U.S. will not seek dollar depreciation in trade agreements. Treasury Secretary Janet Yellen is the sole official handling these issues, and negotiations on currency policy can only occur in her presence. This stance has been reiterated in various international forums, including the IMF spring meeting and the Milken Institute Global Conference.

Despite these assurances, market participants remain cautious. The dollar has experienced significant volatility, with the dollar index dropping nearly 8% this year. This volatility has been particularly pronounced in Asian currencies, with the Korean won, Japanese yen, and other currencies showing unusual movements. Market experts attribute this to the uncertainty surrounding the U.S. government's trade and currency policies.

The report concludes that while the U.S. dollar faces significant challenges, the market's reaction to these issues will depend on various factors, including fiscal policy changes and global economic conditions. The long-term outlook for the dollar remains uncertain, but the current environment suggests that depreciation pressures are likely to persist.