Deutsche Bank has been bullish on the US dollar since the start of the year and sees no reason to pivot in light of three driving factors of US outperformance.
1) US fiscal deficits
The US passed a budget deficit of 5-6% of GDP for the fifth year in a row and DB now calls overspending 'a grand coalition' among Republicans and Democrats and includes "war-time deficit at full employment". Contrast that with the lower spending in Europe and elsewhere and you have a looming fiscal problem but strong growth and USD strength in the meantime.
2) The dollar's safe-haven status
The dollar can get away with high fiscal deficits because the domestic private sector is fully funding public sector spending. Secondly, with the Fed maintaining inflation credibility, it means that Treasury rates will have to be higher. Finally, they tout the dollar's reserve status, which looks invincible. They also note that there is nothing unusual about the US dollar and gold rallying at the same time.
3) China's deflation
"Nowhere is dollar dominance more apparent than the continued upside pressure on USDCNY. Given China's huge external surpluses this is indicative of persistent capital flight and entirely aligned with the combined rally of gold and the dollar this year."
Finally, they note that intervention threats from Japan "are not credible" because the weakness in the yen is driven by flows into carry trades.
