DB: доллар может упасть еще на 30-35%

Why is the dollar collapsing? Every day there is a different narrative. We wrote last week that rising pressure on the Fed to be dovish (we dubbed it the "Pennsylvania Plan") as well as the massively front-loaded German fiscal announcements are helping dollar weakness. Leaving all this aside however, there is one important backdrop: foreigners are no longer buying enough dollar assets to finance America's huge current account deficit. Below we present a few charts using freshly released data to illustrate the point.

The buyer strike on US assets continues. Some have pointed to the April TIC data release as showing that the de-dollarization theme is exaggerated. Looking for evidence of dollar asset liquidation misses the point however: foreigners don't need to sell US assets to weaken the dollar but merely to say "no thank you" to buying more. This continues to be the message of the various high-frequency dollar flow metrics we have. Our ETF data have been pointing to a buyers' strike for a while. The alternative EPFR database which include a broader range of funds gives the same message: there is close to zero buying of US bonds (chart 1) and equities (chart 2) from foreign-domiciled funds over the last few months. US equities may well be rallying due to domestic buying, but foreigners just aren't interested.

The American current account deficit remains very negative. The US trade numbers have been very volatile in recent months due to tariff front-loading effects. But now we have fresh data for May which helps smooth out the noise. Remarkably the US trade balance shows little snapback following the large front-loading of imports in Q1, merely returning to the pre-trade war run-rate (chart 3). Current tariff policy therefore seems to be having little impact on the US external deficit which we estimate to be running somewhere in the 4-5% range. As we have long been highlighting, these are levels that have historically proven unsustainable for the dollar (chart 4), even before considering the weakened US capital flow picture.

So how much does the dollar need to weaken to fix these imbalances? The net international investment position (NIIP) has been at the centre of our global macro framework this year and we have been arguing that dollar weakness is a core mechanism to rebalance US deficits. We found out yesterday that America's NIIP shrunk modestly in Q1 thanks to dollar weakness and US asset underperformance. Let us assume that the US needs to return to a -60% GDP NIIP, which would be in line with prior historical norms. To get there, the dollar would have to weaken by a further 30-35% from current levels (chart 5). Remarkably, this is bang in line with our estimates of how much dollar weakness is required to get the current account deficit back in to balance. To be sure, these numbers are extreme, but that's the point: they highlight just how extreme the current US flow problem is.