US Dollar: Stock-driven flows raise vulnerability – Commerzbank

Commerzbank’s Volkmar Baur highlights that the US current account deficit remains large at about 3% of GDP and increasingly relies on foreign inflows into US stocks rather than bonds. He stresses that equity flows are far more volatile, tying support for the US Dollar more closely to US stock market performance, household wealth, and private consumption, which could be undermined by a market downturn.

Dollar support tied to equities

"While in the four years leading up to mid-2024, the total US current account deficit could have been financed almost entirely by inflows into US bonds, inflows into US stocks have become increasingly important in recent quarters."

"This means that capital inflows - and thus support for the US dollar - will be more heavily dependent on the performance of the US economy and, consequently, the US stock market."

"The US stock market is thus not only responsible for refinancing the US current account deficit but has also become the primary driver of US households’ net worth - and therefore, likely, of private consumption as well."