Deutsche Bank: Three long-term forces are reshaping the dollar's risk profile

Overview

This report examines three categories of forces shaping the dollar's long-term trajectory: first, the divergent effects of geopolitics and technology on the direction of cross-border capital flows; second, the parallel advancement of U.S. financial-asset tokenization and renminbi internationalization; and third, the long-term undervaluation of Asian currencies and their potential repricing. The report's purpose is not to provide a single trading recommendation, but to highlight structural changes in the dollar's sources of funding, risk profile, and global competitive environment.

Core views

The report's core view is that the dollar has not simply lost its dominant position, but that the mechanisms supporting it are changing. Overseas official-sector demand for U.S. debt is weakening under the influence of geopolitics, strategic autonomy, and changing uses of foreign-exchange reserves; in contrast, AI, U.S. corporate profitability, and improved retail-investment channels are driving more foreign capital into U.S. equities. Debt funding is generally more countercyclical, while equity funding is more procyclical, so the change in financing structure may gradually make the dollar less of a traditional safe-haven currency and more of a risk-asset-like currency. At the same time, U.S. tokenized financial infrastructure could help attract global capital, while China is promoting internationalization of the renminbi through cross-border lending, financing, and central-bank liquidity arrangements. Undervalued Asian currencies represent another side of dollar strength, with policy and fundamental developments in China, Japan, Korea, and India warranting close attention.

Analysis framework

The report applies a macro foreign-exchange framework, combining analysis of the balance of payments, cross-border capital flows, public- and corporate-sector balance sheets, financial-infrastructure innovation, policy and institutional changes, and exchange-rate valuation models to assess the dollar's long-term trajectory. The author also draws on observations from recent meetings with clients and colleagues in San Francisco and Singapore to compare the U.S. West Coast fintech narrative with Asian perceptions of renminbi internationalization.

Methodology notes

• Macro foreign exchangeCross-border capital-flow structure analysis

  Differences in the cyclical characteristics of debt and equity funding

  The report distinguishes between overseas demand for debt assets such as U.S. Treasuries and demand for U.S. equities, arguing that the former is more countercyclical and the latter more procyclical; therefore, changes in the financing structure alter the dollar's risk profile.

• International monetary systemFinancial infrastructure and currency internationalization analysis

  Parallel development of U.S. tokenization and renminbi internationalization

  The report treats stablecoins, tokenized assets, and cross-border renminbi financing as important infrastructure variables in long-term currency competition, rather than focusing solely on capital-account openness.

• Foreign-exchange valuationComparison of Asian currency undervaluation

  The mirror relationship between undervalued Asian currencies and dollar strength

  The report notes that six of the ten cheapest currencies in Deutsche Bank's model are in Asia, suggesting that Asian exchange-rate repricing could affect the dollar's long-term strength.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Dollar

  Core research subject

  Strengths

  Supported by the U.S. AI narrative, corporate profitability, foreign equity inflows, stablecoins, and tokenized financial infrastructure.

  Weaknesses

  Weakening U.S. fiscal conditions, declining long-term overseas official-sector demand for dollar debt, and a more procyclical financing structure.

  Comparison

  Compared with traditional dollar cycles supported by demand for U.S. Treasuries, the dollar under the new structure looks more like an asset linked to risk assets and the AI cycle.

  Risks

  A correction in risk assets, cooling of the AI trade, fiscal financing pressures, and geopolitical reserve reallocation could weaken the dollar.

• Renminbi

  Long-term currency-competition variable for the dollar

  Strengths

  Expansion of cross-border renminbi lending and financing; the PBOC FIMA repo facility helps provide renminbi liquidity to central banks and sovereign wealth funds.

  Weaknesses

  Western markets remain focused on the constraint that China's incomplete capital-account openness places on renminbi internationalization.

  Comparison

  Unlike the United States, which attracts capital through tokenization of financial assets, China focuses more on promoting renminbi usage through external financing and lending.

  Risks

  Capital-account restrictions, dependence on external demand, geopolitical frictions, and the pace of policy implementation could affect the internationalization process.

• Asian currencies

  Mirror assets to dollar strength

  Strengths

  Many Asian currencies are cheaply valued and could have room to recover if policy or external pressures drive repricing.

  Weaknesses

  Capital outflows, uncertain manufacturing prospects, AI-related effects on services, and policy constraints could continue to weigh on exchange rates.

  Comparison

  China, Japan, Korea, and India together account for more than the euro's weight in the Fed's broad dollar index, giving Asian exchange-rate movements systemic significance for the dollar.

  Risks

  A decline in global risk appetite, renewed dollar strength, trade frictions, and conflicts among domestic policy objectives could delay appreciation.

• Yen

  One of the key focal points of uncertainty in Asian foreign exchange

  Strengths

  Falling oil prices, near-extreme speculative short positions, and intervention limiting volatility could all create conditions for USD/JPY downside.

  Weaknesses

  The Japanese government emphasizes high nominal growth to reduce debt/GDP, which could imply greater tolerance for inflation.

  Comparison

  Unlike ordinary undervalued currencies, the yen's trajectory also depends on the interaction between fiscal, industrial, and growth strategies and the inflation target.

  Risks

  If policy becomes more tolerant of inflation while the Federal Reserve places greater emphasis on inflation, the yen's recovery path could become more complicated.

Key data

• Report date2026-07-07The date disclosed in the text is Date 7 July 2026.
• U.S. external financing structureRising equity inflows and declining debt inflowsThe report states that the United States is now financing itself more through foreign equity funding than debt funding.
• DTCC tokenized-asset universeUSD115tnThe report mentions that DTCC began tokenizing its real-world assets under custody this month, with an asset universe of USD115tn.
• Undervalued Asian currenciesSix of the ten cheapest currencies in Deutsche Bank's model are in AsiaThe report views this as the opposite side of dollar strength.
• Yen positionNear a 40-year low against the dollarThe report considers uncertainty surrounding the yen to be particularly pronounced.
• Korean market performanceExports up 50% and equities nearly up 100%The report states that despite strong fundamental and policy support, the Korean currency continues to suffer from capital outflows.

Impact & implications

The investment implication is that a long-term assessment of the dollar should not focus solely on interest-rate differentials or traditional safe-haven demand, but should also track the divergence between U.S. fiscal conditions and corporate profitability, the AI capital-expenditure and earnings cycle, the ease with which overseas retail funds enter U.S. equities, the expansion of tokenized financial infrastructure, cross-border renminbi financing tools, and policies affecting major Asian currencies. If the dollar's funding sources become more dependent on equity and technology narratives, the dollar could become more vulnerable during risk-asset downturns; however, if the U.S. tokenized-asset ecosystem develops rapidly, the dollar's dominance in payments and settlement could receive support in a new form.

Risks

• The dollar could become more vulnerable during risk-asset corrections as financing shifts toward procyclical equity funding.
• A deterioration in U.S. fiscal conditions could further weaken overseas official-sector demand for dollar debt.
• If the AI trade cools, it could simultaneously undermine the attractiveness of U.S. equities and the dollar-support logic.
• Renminbi internationalization remains constrained by the degree of capital-account openness, policy pace, and geopolitical factors.
• Asian currency repricing could be limited by capital outflows, trade frictions, and conflicts among domestic policy objectives.
• Foreign-exchange, derivatives, and fixed-income instruments involve exchange-rate, interest-rate, liquidity, leverage, and counterparty risks.

What to watch

• Changes in overseas official-sector demand for U.S. Treasuries and other dollar-denominated debt assets.
• The persistence of overseas retail and institutional inflows into U.S. equities, particularly AI-related assets.
• The pace of progress on U.S. stablecoin regulation, real-world-asset tokenization, and infrastructure initiatives such as DTCC.
• Use of cross-border renminbi lending, renminbi financing, and the PBOC FIMA repo facility.
• European policy pressure concerning China's currency undervaluation and competitiveness.
• The trade-offs among China's domestic demand, export dependence, and exchange-rate policy.
• The effectiveness of India's FCNR-related policies in supporting the exchange rate over the short term.
• The divergence among Korean exports, the equity market, central-bank pricing, and capital outflows.
• The combination of yen intervention, oil prices, speculative positioning, and Japan's high-nominal-growth policy.