US Dollar Vulnerability Rises as Stock Flows Replace Bond Inflows

Commerzbank's Volkmar Baur warns that the US dollar's dependence on foreign inflows into US stocks has increased its vulnerability. The US current account deficit remains large at about 3% of GDP and is increasingly reliant on these flows rather than bond investments.

The total US current account deficit in the four years leading up to mid-2024 could have been financed almost entirely by inflows into US bonds, but in recent quarters, inflows into US stocks have become more significant. This shift means that capital inflows supporting the US dollar will be heavily dependent on the performance of the US economy and its stock market.

The US stock market is not only responsible for refinancing the US current account deficit but has also become a key driver of US households' net worth, which in turn affects private consumption. Baur stresses that equity flows are far more volatile than bond inflows, making the dollar's support more closely tied to US stock market performance.