Deutsche Bank: The dollar isn't dying, it's mutating into a risk asset

Deutsche Bank strategist Mallika Sachdeva is out with an FX Special Report today that's worth your time, laying out three long-term forces reshaping the dollar. The upshot: the greenback's problem isn't that the world is abandoning it — it's that the world is changing how it owns it, and that changes what the dollar is.

1) The funding mix is flipping — and that makes the dollar riskier

The core observation is a rotation in how the US funds its external deficit. Foreign official demand for US government debt has been eroding since the geopolitical ruptures of recent years, and DB argues that could deepen as countries build strategic autonomy in defence and energy — projects that may require drawing down savings currently parked in dollars.

At the same time, foreign equity capital is pouring into the US at a record clip, much of it retail. Korea's seohakaemi wave and Japan's NISA accounts get name-checked as emblems of a structural shift: falling frictions have made it trivially easy for a household in Seoul or Osaka to own the S&P 500. The gap between net equity inflows (rising) and net long-term debt inflows (falling) is the widest it has ever been.

DB ties this to a balance-sheet divergence that should be familiar to anyone watching the CBO projections: the US fiscal position keeps deteriorating while corporate profits as a share of GDP keep climbing. AI could widen that split further — companies get richer, governments face growing redistributive pressure.

Why it matters for FX: Treasury demand was countercyclical. When risk assets fell, money flowed into Treasuries and the dollar caught a bid, which is precisely why so much foreign USD exposure went unhedged. Equity-funded external deficits don't work that way. A retail-driven, tech-heavy funding base makes the dollar, in the note's words, "more risky and more leveraged to AI." That's a profound change in the dollar's character. The next risk-off episode may not come with the reflexive dollar rally that hedgers and reserve managers have counted on for decades.

2) Two payment revolutions, and neither side is watching the other

The second theme comes from the road. Sachdeva spent recent weeks with fintechs and real money in San Francisco, then colleagues in Singapore, and the contrast in what each side was excited about — and blind to — was the story.

On the West Coast, the energy wasn't just AI. Blockchain was being pitched as the new plumbing of global finance, a way to expand access to the dollar, US finance and US capital markets. The logic: if global leadership flows from access to the deepest, cheapest capital, then tokenization lowers the walls and widens America's lead. Stablecoins are the payments layer; the bigger prize is settlement for tokenized assets. DTCC began tokenizing its real-world custody assets — a universe of roughly $115 trillion — this month. DB found little appreciation of this outside the US.

But the blindness runs both ways. In America, there's a stale skepticism that RMB internationalization goes nowhere without an open capital account. In Asia and across the Global South, the view is different. Cross-border RMB lending and financing is expanding — dim sum bond issuance has gone nearly vertical since 2023 — and the PBOC has quietly rolled out a FIMA-style repo facility letting central banks and sovereign wealth funds swap Chinese government bonds for RMB liquidity. Tokenization pulls capital into the US; RMB internationalization pushes capital out of China. Both are underway simultaneously, and ignoring either is a mistake.

3) Asia is a continent of cheap currencies — and the JPY is the big one

Six of the ten cheapest currencies on DB's valuation models are Asian, and these aren't frontier markets. Korea, Japan, India and China together carry more weight in the Fed's broad dollar index than the euro does.

On China, DB sees mounting European pressure over undervaluation but no Plaza Accord redux — Beijing studied what that did to Japan. Still, with domestic demand soft, China needs foreign markets open to its goods and may accept a stronger currency as the price of admission, especially now that its competitiveness rests more on innovation and quality than cost. India's revival of the 2013 FCNR playbook offers near-term support, with longer-term questions unresolved. Korea remains the puzzle: exports up 50%, equities nearly doubled, a hawkishly-priced BoK — yet capital outflows keep hammering the won.

The yen is where DB sees the greatest uncertainty. It sits near 40-year lows against the dollar, intervention has suppressed volatility, falling oil opens dollar downside, and speculative shorts are near extremes. But the wildcard is politics: PM Takaichi's economic blueprint explicitly targets high nominal growth as the path to lower debt/GDP. Read plainly, that's a government with a higher inflation tolerance — arriving just as the Fed gets more serious about fighting it. That's the kind of policy divergence that ends 40-year trends.

The takeaway

String the three together and the message is coherent: the dollar is being re-rated from safe haven to growth asset and it should trade that way. It's increasingly funded by equity flows, levered to the AI trade, and facing a slow bleed in official debt demand — while the cheapest major currencies in the world sit across the Pacific with catalysts stacking up. For anyone running unhedged dollar exposure on the old countercyclical logic, this note is a warning shot.