Edward Conard

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  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
Upside of Inequality Oxford Unintended Consequences

AI Summary. The dollar has fallen while the trade-weighted interest rate differential between the US and the rest of the G10 has remained stable, which the author attributes to equity flows as investors reverse bets on US "exceptionalism." The author argues this weakness is likely temporary and that the dollar remains in a multi-decade strengthening cycle.

Robin Brooks Robin Brooks Substack
Date Posted:

The Dollar has fallen sharply since April 9, but trade-weighted, the US-G10 interest differential is stable. Brook argues the dollar depreciation is driven by equity outflows with bonds a “side-show,” and that dollar weakness is likely to be temporary.

Are equity flows driving the dollar's decline rather than interest rate differentials?

Core argument: The dollar has fallen sharply since the April 9 announcement of a 90-day pause on reciprocal tariffs, while the US trade-weighted interest rate differential versus the rest of the G10 has remained stable, a decoupling robust to alternative measures of the differential.

The Dollar (black line) has fallen sharply, especially since the 90-day pause of reciprocal tariffs was announced on April 9, while the trade-weighted rate differential of the US vis-à-vis the rest of the G10 has been stable (blue). Rate differentials are stable while the Dollar is falling [and this is] robust to different versions of this differential. The most benign interpretation for this decoupling is that equity flows are the principal driver of Dollar weakness. Markets had bought into US “exceptionalism” and are now reversing themselves on that theme. This may see many foreign buyers cut their allocation to US equities. This is a cyclical re-assessment of the US growth picture, expressed via equities, which would explain why bond markets and thus rate differentials are a side show. At this point, I am almost sure the decoupling is the former. Current Dollar weakness is therefore likely temporary. In my view, the Dollar is in a multi-decade strengthening cycle, which is far from over. More Dollar strength is coming.

Takeaways by Macro Roundup® AI

  1. The dollar has fallen sharply since the April 9 announcement of a 90-day pause on reciprocal tariffs, while the US trade-weighted interest rate differential versus the rest of the G10 has remained stable, a decoupling robust to alternative measures of the differential.
  2. The author attributes dollar weakness principally to equity flows, arguing markets that had bought into US "exceptionalism" are reversing, which may lead many foreign buyers to cut their allocations to US equities.
  3. The author reads the move as a cyclical re-assessment of US growth expressed through equities, with bond markets and rate differentials a side show, and judges current dollar weakness likely temporary within a multi-decade strengthening cycle.

Related Articles:

  • What Ails the US Dollar? — The US dollar's 10% decline from its peak includes about 4 percentage points attributable to euro strength following Germany's surprise fiscal stimulus, leaving the dollar roughly flat on an adjusted basis. Because reserve currency status took decades to build and has persisted through past policy swings, the author argues the weakness reflects a cyclical rerating rather than terminal decline.
  • Why Didn’t Tariffs Push up the U.S. Dollar? — The US dollar was exceptionally strong at a level implying an ever-shrinking export base and an ever-growing trade deficit, requiring continually larger foreign inflows at ever more inflated dollar and US equity valuations to sustain. Even after its recent slide, the dollar remains strong by almost all measures.
  • Top Dollar — Foreign holdings of U.S. financial assets exceed American holdings abroad, making the United States a net debtor whose liabilities are denominated in dollars while its foreign assets are largely in other currencies. U.S. foreign liabilities grew from $30tn to over $51tn while U.S. foreign assets grew from $24tn to $33tn, tripling the net debtor position from $6tn.
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