US Dollar: Dovish Fed repricing versus strong flows – BBH

Brown Brothers Harriman's Elias Haddad discusses a complex situation for the US Dollar (USD), noting that a seemingly dovish Federal Reserve (Fed) re-evaluating its stance could limit USD gains despite strong foreign demand. According to TIC data, foreign investors have been purchasing significant amounts of long-term US securities, with a particular preference for equities over Treasuries.

Haddad dismisses concerns that USD might be susceptible to equity market corrections, emphasizing the role of safe-haven Treasury rotation. Meanwhile, rising crude oil prices are contributing to higher bond yields and exacerbating already challenging fiscal situations. The USD recovered from yesterday's decline as equity markets continue to falter, reflecting the impact of the Fed's potential move towards a more dovish stance.

Despite foreign investors accumulating $1778 billion worth of long-term US securities in the twelve months to June, surpassing the -$743 billion trade deficit during the same period, their preference for equities over Treasuries remains evident. This preference for equities could potentially make the USD more vulnerable to equity market corrections, though Haddad argues that a market-wide sell-off would likely prompt investors to shift back into safe-haven Treasuries, reinforcing the dollar's protective qualities.