Dollar Support Tied to Equities as Current Account Deficit Persists

Commerzbank's Volkmar Baur notes that the US current account deficit remains substantial at around 3% of GDP. This is a significant vulnerability, as the US relies increasingly on foreign inflows into US stocks rather than bonds to finance its trade imbalance.

In recent quarters, equity flows have become a crucial factor in supporting the US dollar, making it more closely tied to US stock market performance and household wealth. A decline in the stock market could undermine support for the dollar.

Baur emphasizes that while inflows into US bonds were sufficient to finance the current account deficit in the four years leading up to mid-2024, equity flows have become increasingly important in recent quarters.