The general line of thinking in markets this year has been that with Trump's erratic policies and tariffs, it is all serving to bite at the US economy and the dollar. I admit, even I have been sold on the narrative that a weaker dollar has been in part driven by a shake up in confidence and credibility to the currency in the past few months.
But besides the evidence we can see in FX flows, there's another story in the background that is worth taking notice of.
The latest Treasury International Capital (TIC) data for July actually showed that foreign demand for US-denominated assets remain strong. That despite alleged concerns about tariffs and the administration's policy incoherence in handling many things, including the whole Fed ordeal.
Now, the monthly data hasn't quite yet captured the dovish pivot by the Fed itself but after the rate cut decision last week, it's not to say that the Fed has leaned overly dovish in any case.
So, let's take a look at what some of the TIC data is saying (full data here).
For one, foreign investors ended up with net purchases of long-term US securities worth $78.8 billion. The year-to-date figure shows net purchases worth $865.1 billion. For some context, the 2024 figure showed net purchases worth $1,180.4 billion. So, it's not to say that there has been a material slowing down in investor appetite for US assets.
The large chunk of those buying for July were in Treasury bonds/notes and corporate bonds/notes, amounting to $85.4 billion. That is partially offset by equity outflows on the month, which totaled to $16.2 billion. Now, are investors moving away from US stocks? Not quite.
The net outflow in July comes after record inflows during May and June, which amounted to $115.8 billion and $163.1 billion respectively. And we all know, one month doesn't make a trend.
Looking into more details, total foreign holdings of Treasuries also moved up to hit a record $9.2 trillion. And of note, EU holdings of US-denominated assets also hit a record of $8.9 trillion in July. (h/t @ Credit Argicole)
As such, that continues to underscore the strong appetite for US assets even during these supposed testing times for the dollar and the US economy.
So, what does this all tell us?
The dollar may be softer this year amid poor market sentiment and a confidence struggle in general. But if and when these headwinds come to pass, the underlying flows suggest that any potential rebound in the dollar is one that is going to carry a large weight supported by the still strong investor appetite for US assets.
And if anything else, this does shoot down the thinking that foreign investors are moving away from the dollar and the US. In fact, it's far from the reality as seen above.
