US Dollar to Weaken but at a Slower Pace Than 2025, Deutsche Bank's Saravelos Says

Watch US Dollar to Weaken but at a Slower Pace Than 2025, Deutsche Bank's Saravelos Says - Bloomberg on Dailymotion

Transcript

00:00George Sarovellas of Deutsche Bank writing, we project further dollar weakness, but at a slower pace than 25.

00:06George joins us now for more. George, welcome to the program and happy new year to you, sir.

00:09Let's start with the chart. The chart of DXY, the dollar index, sold aggressively as we started 2025 and flatlined since May, June of last year.

00:17It's basically done nothing. So can we deal with that first? What's behind the nothing over the last six months?

00:23Happy new year to you as well, John. So we definitely saw the DXY, as you say, stabilize around the summer.

00:31But effectively, the dollar weakness rotated from some of the developed currencies to emerging markets.

00:37So we have to remember dollar China started moving sharply lower from the summer onwards, a lot of emerging market currencies.

00:44So actually, if you look at the trade weighted dollar, the broad trade weighted dollar, it was moving down pretty much throughout the year.

00:51And in fact, in December, I just updated some of my own charts.

00:55The full year drop in the dollar in 25 was the second biggest drop on record since free floating exchange rate started after Bretton Woods.

01:06So it was a very big year for effects. I would argue it's going to be very difficult to repeat that type of move in 26,

01:14though there's certainly a lot of interesting stories going on, of course, in the background.

01:17Well, let's explore some of that a little bit further, George.

01:19So if you are anticipating further dollar weakness, give us the why.

01:23And then two, just to build on what you said, how to play it and what against.

01:29So the why is mostly on the back of cyclical reasons, because there is an underlying story around dollar dominance.

01:36But if you go back, you see those properties of the dollar that make it dominant in payments, in reserves.

01:44These take decades to change.

01:47So the view is more about the cyclical dynamics.

01:49And there's a couple of things that have happened over the last 12 months.

01:53The first thing is the dollar is no longer the world's highest yielding currency in developed markets,

01:58at least because the Fed's been cutting rates, as everyone else has stopped doing the same.

02:03And empirically, the dollar being a high yielder is a big deal.

02:07And when it no longer is a high yielder and you've got other currencies now, for example, in Australia or in Norway,

02:14taking on that property, that removes a big tailwind for the dollar.

02:19So that's number one.

02:20Number two is if you look at the global composition of growth, over the last few years, the U.S. was leading the pack.

02:27And what you've seen over the last 12 months is global growth broadened out to other economies as well.

02:33Europe is, of course, doing fiscal stimulus.

02:36Japan is potentially joining.

02:38So overall, a solid global growth outlook, but with growth convergence and the dollar being less of a high yielder,

02:46plus a very large external deficit that's very reliant on AI inflows.

02:51That's pretty much the mix that I think should allow the dollar to continue to weaken.

02:55But at a much slower pace than we saw last year.