Deutsche Bank warns trade tensions threaten USD’s funding edge, sees rotation out

Deutsche Bank expects U.S. economic momentum to slow into the second half of the year, though a recession remains unlikely. Still, the bank cautions that rising trade tensions and policy unpredictability are starting to undermine the structural funding advantage the U.S. has long enjoyed.

Strategists remain structurally bearish on the U.S. dollar, warning that reputational damage from the trade war could gradually erode investor confidence:

• dollar is now increasingly influenced by valuation, capital, and hedging flows rather than interest rate differentials
• the U.S. current account deficit—nearing 4% of GDP—is historically a drag on the currency
• America’s deeply negative net international investment position leaves it exposed, as foreign investors hold large volumes of U.S. assets

Deutsche Bank sees growing appeal in undervalued surplus currencies. It expects a rotation into currencies backed by external surpluses and more stable macro outlooks. The euro is seen benefiting from a potential German fiscal boost and lower energy prices, which could lift growth expectations. The yen, described as the cheapest G10 currency, may be supported by Japan’s tightening policy stance and its large holdings of U.S. assets. The Chinese yuan also stands to gain amid signs of a U.S.-China trade détente and attractive valuation levels.

That said, Deutsche Bank notes key risks to its view. A softer U.S. trade approach and a more growth-friendly fiscal policy could slow the pace of dollar weakness. On the other hand, more erratic trade policies or aggressive fiscal tightening could accelerate the dollar’s decline.

This article was written by Eamonn Sheridan at www.forexlive.com.