Investing.com -- The global financial system is undergoing a historic shift away from the U.S. dollar, and the implications could redefine America’s fiscal and foreign policy flexibility, Deutsche Bank’s George Saravelos said.

Despite former President Donald Trump’s reversal on tariff threats, Saravelos argued that the damage to the USD has been done.

He pointed to a rapid process of de-dollarization, evident by the simultaneous selloff in both the dollar and U.S. bond markets.

At the core of Saravelos’ thesis is a reassessment of U.S. fiscal space. He said the sustainability of sovereign debt depends less on debt-to-GDP ratios and more on external imbalances, particularly a country’s reliance on foreign financing.

For decades, the U.S. was the exception, able to fund its twin deficits thanks to the dollar’s role as the world’s reserve currency.

With this now changing, the steady state level of sustainable U.S. fiscal deficits is moving lower, Saravelos says.

This reduces the flexibility of the U.S. administration in pursuing expansionary fiscal policy to support growth.

The pressure extends beyond economics. As the U.S. becomes more dependent on foreign financing, international investor sentiment becomes increasingly pivotal.

It is an oft-repeated phrase that a twin deficit country is dependent on the ‘kindness of strangers.’ This now applies to the U.S., Saravelos said, warning that Washington may have to adopt a more conciliatory foreign policy to preserve market stability.

Saravelos pushed back against comparisons to emerging markets, where simultaneous currency and bond market weakness often leads to crisis.

The key difference, he said, is that the U.S. has no significant foreign currency liabilities, reducing the risk of spiraling debt dynamics. Instead, he suggested market weakness could eventually attract foreign capital back into U.S. assets, if valuations adjust far enough.

The dollar’s biggest challenge at the moment is its starting point of high valuations, high foreign asset allocations and a confrontational foreign policy approach, he said.

Saravelos noted that rising fiscal space in alternative reserve currencies like the euro could be offset by unwanted currency appreciation, potentially prompting a dovish pivot by the European Central Bank.

He concluded that the shift in global capital flows unleashed by de-dollarization is likely to have far-reaching and unpredictable consequences.