Dollar Faces Mixed Backdrop as Fed Moves Curb Rebounds
The US Dollar is facing a mixed backdrop due to dovish Federal Reserve repricing and strong foreign demand. According to Brown Brothers Harriman's Elias Haddad, the dollar's rebounds are being capped by the Fed's moves, despite robust foreign purchases of long-term US securities.
TIC data show that foreign investors accumulated $1778bn of long-term US securities in the twelve months to June, surpassing the -$743bn accumulated US trade deficit over the same period. This includes a record $920bn worth of US stocks purchased by foreigners compared to just $294bn for Treasuries.
Haddad rejects the view that the dollar is vulnerable to an equity correction, citing safe-haven Treasury rotation. He believes that if foreign investors unwind their US stock holdings due to a broad market sell-off, they would simply rotate back into Treasuries, underpinning the dollar's defensive appeal.
The renewed upswing in crude oil prices has pushed bond yields higher and worsened fiscal dynamics, but this has not led to a significant drop in equity markets. Instead, the US Dollar recovered yesterday's losses, with Haddad noting that the risk of further dovish Fed repricing will keep USD rebounds shallow and short-lived.