Foreign flows into the US at record highs

Flows into longer-term assets, especially US equities, remain very strong through June

There’s a remarkable degree of pessimism on the US economy at the moment. However, there’s a big difference between what people say and what they do. That’s evident in flows into longer-term US assets, which came roaring back in May after brief outflows in April after the chaos of reciprocal tariffs. The US Treasury on Friday published the latest data for foreign buying of longer-term US assets. On a rolling one-year basis, those flows reached a new record high. There’s an obvious tension between the strength of these inflows and the weak Dollar. I expect that tension to be resolved in favor of the Dollar, which should rebound as foreign inflows assert themselves.

The chart shows a rolling 12-month sum of foreign net inflows into long-term US assets. The latest data through June show very strong inflows into equities (purple) in particular, which points to growing market optimism on US growth. Foreign flows into other asset classes are weaker, but there is no sign of an exodus, which is what you might expect to see if you listen to the prevailing narrative on the US.

The strength of these inflows stands in obvious tension to the US Dollar, which is down around 10 percent so far this year. Two points are worth making. First, the Dollar fell sharply earlier this year, but has been almost stable since May, which is more consistent with these inflows. After the chaos of the reciprocal tariff rollout, markets appear to have rediscovered their faith in US growth outperformance. Second, it is possible that a growing fraction of these inflows is FX hedged, so that they do little to actually lift the Dollar. This would imply that foreign investors are taking growth-positive positions while remaining negative on the Dollar. However, historically there is relatively little FX hedging for equity inflows, so I tend to put little weight on this caveat.

The most likely reason why these inflows haven’t yet translated into a Dollar rebound is that there are still way more Fed cuts priced than for other central banks, so there may still be lots of short-term outflows not covered in these data. If that’s the case, I expect this tension to be resolved in favor of the Dollar, with longer-term flows asserting themselves and pushing the Dollar higher going forward.