Foreign investor strike leaves dollar vulnerable amid trump policies

The American currency has been losing value since mid-January, marking the start of Donald Trump’s second term in the White House. During this period, the so-called dollar index, which reflects its rate against six other major world currencies, decreased by 10%, reaching its lowest point in over two years.

Even Trump's decision on April 9 to suspend, for 90 days, the broad tariff hikes announced a few days earlier did not halt the dollar's depreciation. However, it did stop the selloff in American stocks and Treasury bonds. The fact that the dollar is losing value while American assets are gaining suggests that domestic investors are buying what foreigners are selling.

George Saravelos, the chief currency analyst at Deutsche Bank, refers to this as a "strike by foreign investors." For every seller of American assets, there must be a buyer. But what foreign investors do matters for the dollar's exchange rate. Our analyses suggest they are orchestrating a strike against American assets, he explains in his Monday report.

Calculations by Deutsche Bank, along with similar estimates from Goldman Sachs analysts, indicate that this is not a general strike. European investors mainly conduct it, while investors from other regions continue to demand American assets. Moreover, investors are withdrawing more from the American bond market than from the stock market. In the latter case, the outflow of foreign capital is small compared to the massive inflow before Trump's presidency.

The U.S. Treasury Department publishes detailed data on financial flows between the U.S. and other countries, but it appears with a six-week delay. To monitor these flows in real-time, analysts focus on changes in the balances of foreign ETF funds—those whose participation units are listed on stock exchanges—which invest in the American market.

According to calculations by David Kostin's team, the chief U.S. stock market analyst at Goldman Sachs, from the beginning of March to April 24, foreign investors reduced their market engagement by about $63 billion. Is that a lot? In January and February, the same group of investors increased their engagement in American company stocks by $11 billion. In November and December, they collectively increased their engagement by $204 billion. This means that in the past two months, only 30% of the foreign capital that flowed into the U.S. stock market in the last two months of 2024, as part of the so-called "Trump trades," has been withdrawn.

Analysts from Goldman Sachs, in a report a few days ago, recall that since the 1980s on Wall Street, significant outflows of foreign capital have occurred 10 times – the last being at the end of 2023 and the beginning of 2024. These episodes lasted an average of 11 months and ended with a 0.6% reduction in foreign investors' involvement in American company stocks in the market capitalization. If the current' investor strike" were to resemble these earlier ones, the outflow of foreign capital would need to reach around $300 billion.

Theoretically, foreign investors could withdraw much more capital from the U.S. stock market (in proportion to the market's capitalization) than in the past. This is because their share in the ownership of American companies is larger than ever before. At the beginning of 2025, foreign portfolios held 18% of shares in U.S. companies (both public and private) compared to 9% in 2000.

Kostin and his team previously expected that in 2025, foreigners would increase their involvement in American stocks by $300 billion. Currently, they admit this is unlikely. But even less likely, in their opinion, is the scenario of a mass retreat of foreign investors from the U.S.

– Many of the pillars of "U.S. exceptionalism" still hold, including the high profitability of American companies (…). Moreover, the size and liquidity of other stock markets relative to the American market limit the potential rate of capital reallocation out of the U.S., they explain. They emphasize that so far, investments in American stocks are reduced almost exclusively by European investors. At the same time, those from other parts of the world continued to buy stocks on Wall Street in March and April.

Goldman Sachs analysts note that all previous episodes of foreign investor withdrawals from Wall Street, with one exception, were accompanied by a strengthening of the US dollar. This could have been due to the constant influx of foreign capital into the American bond market. This time, according to Deutsche Bank's analysis, these securities are also out of favor with foreign investors.

Deutsche Bank's estimates confirm, at first glance, the conclusions of analysts from Goldman Sachs: so far, there has been no massive retreat of foreign capital from the U.S. Nevertheless, Saravelos points out that the current investor attitude towards American assets does not bode well for the dollar.

Saravelos noted in Monday’s analysis that, based on their estimates, the best-case scenario suggests capital inflows into the U.S. have come to a sudden halt. In contrast, the worst-case scenario points to a reversal into outflows. Either situation poses a challenge for the dollar, particularly given the U.S.'s dual deficits—both in its current account and federal budget. He emphasized that the overall outlook is far from encouraging.

According to him, the American currency has a long period of depreciation ahead. By 2027, the euro-to-dollar rate is expected to jump to 1.30 from its current level of barely 1.14 and just over 1.02 at the beginning of 2025. Meanwhile, currency analysts from Goldman Sachs expect the euro-dollar rate to rise to 1.20 by the end of 2025.