In a recent analysis, George Saravelos, the head of FX strategy at Deutsche Bank, has revealed striking insights into the behavior of overseas investors in the U.S. market. His examination of fund flows indicates a significant decline in foreign investments in U.S. stocks and bonds over the past two months, raising concerns about the future of the U.S. dollar. Despite a brief improvement in market sentiment last week, the data suggests that foreign investors are pulling back.

Declining Interest from Overseas Investors

Saravelos highlighted a “sharp stop” in purchases of U.S. assets by international buyers. His report pointed out that this trend signals a potential slowdown in capital inflows or, at worst, active disinvestment from U.S. assets. Such a scenario presents challenges for the dollar, which is considered a "twin deficit" currency.

• Key Findings:
  • Significant drop in foreign asset purchases in the last two months.
  • No signs of recovery even as market conditions showed improvement.

Shift in Dollar Sentiment

Historically, Saravelos had a bullish outlook on the dollar, especially against the euro, until early February. However, he has since adopted a bearish stance, cautioning that the dollar’s status as the global reserve currency could be jeopardized if President Donald Trump’s economic policies lead to an exodus of foreign investments.

Notable Statistics:

• The share of U.S. assets in European portfolios surged from 5% in 2010 to 20% in 2024.
• Japanese investment in U.S. assets doubled to 16% in the same timeframe.

Market Reactions to Tariffs

The dollar, along with U.S. stocks and Treasuries, experienced a significant downturn following Trump’s tariff announcements in early April. This simultaneous selloff has raised alarms about a mass retreat of foreign investors from U.S. markets.

Analyzing Fund Flows

To gain a clearer picture of these trends, Saravelos has been closely monitoring daily flows into around 400 U.S.-focused exchange-traded funds (ETFs) based overseas, as well as weekly data from a larger pool of investment funds. His findings illustrate a troubling trend.

• ETF Insights:
  • Increasing selling pressure on both stocks and bonds.
  • While some funds have paused purchasing U.S. stocks, they have not yet become net sellers.

Future Predictions for the Dollar

Revising his previous forecasts, Saravelos now anticipates a decline in the dollar’s value. He predicts that the U.S. currency could fall to $1.30 against the euro and 115 yen by 2027, down from current levels of approximately $1.14 and 142 yen respectively.

In summary, Saravelos’ analysis raises important questions about the future of foreign investment in U.S. assets and the potential implications for the dollar and the broader economy. As the landscape continues to evolve, investors will need to stay informed and adaptable to these shifting dynamics.