-
The US Dollar Index has dropped to a three-year low.
-
It’s a sign the greenback is losing its reserve currency appeal, Deutsche Bank warned.
-
That will make US spending unsustainable, the bank said.
Dollar strength is waning amid tariff backlash and the US should be prepared to face some tough consequences as a result, Deutsche Bank wrote this week.
The US Dollar Index, which measures the greenback against a basket of other major currencies currencies, has dropped to a three-year low as of Friday, trading below the 100 mark.
“A breakdown from the dollar’s consolidation range would not only be technically significant but could also stoke fear over the health of the U.S. economy,” LPL Financial’s Adam Turnquist said on Friday.
The steep plunge highlights that foreign investors are ditching dollar-denominated US assets, as American markets lose their appeal amid tense tariff uncertainty and confidence-shaking moves in stocks and bonds.
According to analyst George Saravelos, the sudden plunge in dollar demand also suggests that countries are reconsidering their dependence on the greenback, which has been the world’s leading reserve currency for nearly a century.
That’s bad news for US economic sustainability, he argued.
The dollar’s supremacy is the reason the US has been capable of sustaining high debt levels that have fueled blowout economic growth, Deutsche Bank’s global head of FX research said.
Essentially, the greenback’s status as the premier reserve currency provided Washington with secure funding that has enabled the US to spend in excess of its revenue. Last year, the US spending deficit hit $1.8 trillion.
Still, foreign demand for dollars has kept up due to the greenback’s historic stability and reputation as a safe haven.
“With this now changing, the steady state level of sustainable US fiscal deficits is moving lower,” Saravelos wrote. “This reduces the flexibility of the US administration in pursuing expansionary fiscal policy to support growth, much in the same way the UK and France have faced similar constraints.”
While analysts have questioned the sustainability of US debt and spending habits, this was considered a problem that would manifest in the coming decades. However, if investors are quickly ditching the dollar, it might become a more immediate concern.
To ensure funding, good economic policies with other countries are essential, Saravelos said.
“We argued more than a month ago that references to the ownership of Greenland, for example, where contributing to an undermining of USD stability,” Saravelos said. “We suspect the US administration will have to adopt a more conciliatory stance in international relations to maintain stability in the bond market going forward.”
