US Dollar: Dovish Fed repricing versus strong flows – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad highlights a mixed backdrop for the Dollar, with dovish Federal Reserve (Fed) repricing seen capping US Dollar (USD) rebounds even as foreign demand remains strong. TIC data show sizeable foreign purchases of long-term US securities, particularly equities over Treasuries. Haddad rejects the view that USD is vulnerable to an equity correction, citing safe-haven Treasury rotation.

USD capped yet underpinned by foreign demand

"In parrel, the renewed upswing in crude oil price is pushing bond yields higher and worsening already fragile fiscal dynamics. Equity markets are down and USD recovered yesterday’s loss. The risk of further dovish Fed repricing will keep USD rebounds shallow and short-lived."

"The US Treasury International Capital (TIC) data showed that underlying demand for USD remained strong. In the twelve months to June, foreign investors accumulated $1778bn of long-term US securities, eclipsing the -$743bn accumulated US trade deficit over the same period."

"Interestingly, foreign investors (private and official) continue to favor US equities over Treasuries. Foreign purchases of US stocks totaled a record $920bn in the twelve months to June compared to just $294bn for Treasuries."

"This has led some to argue that the dollar is increasingly vulnerable to an equity market correction, as foreign investors unwind their US stock holdings. We disagree. A broad stock market sell-off would simply encourage foreign investors to rotate back into safe-haven Treasuries, underpinning the dollar’s defensive appeal."