Dollar Index Drops 1.1% as Foreign Investors Pull Capital

Over the past two months, foreign investors have significantly reduced their capital inflows into the U.S. bond and stock markets. This trend, combined with the U.S.'s existing twin deficits, poses a potential challenge to the dollar. The dollar index, which had shown some recovery in the latter half of last week, experienced a sharp decline on Monday. Investors are cautiously awaiting further news on U.S. trade policies and preparing for a week filled with economic data releases that could provide initial indications of the impact of President Trump's trade war on the economy.

The dollar index fell below the 99 mark during overnight trading, reaching a low of 98.89. Against the Japanese yen, the dollar dropped by 1.1%, hitting 142.10, marking the largest single-day decline since April 10. Meanwhile, U.S. stocks showed mixed performance overnight. While the Dow Jones and S&P 500 indices rose for the fifth consecutive trading day, the Nasdaq closed with a slight decline. The market's current characteristics include a correlation between the dollar's weakness and doubts about the stock market. Although corporate earnings are expected to keep the market active, the primary concern remains the lack of confidence in the U.S. economic outlook.

Despite a market recovery last week, foreign investors' willingness to invest in U.S. assets continues to decline. The recent U.S. capital flow data indicates that foreign investors' capital inflows into the U.S. bond and stock markets have stagnated over the past two months. Given the U.S.'s existing twin deficits, this could pose a challenge to the dollar.

Nearly 400 large exchange-traded funds (ETFs) registered outside the U.S. (primarily in Europe) that invest in the U.S. stock and fixed-income markets have been closely monitored. These ETFs are typically used by non-U.S. investors to allocate U.S. assets and can serve as an indicator of foreign investment activity. According to the data, foreign investors have been continuously selling U.S. stocks and bonds over the past two months. The selling of U.S. stocks peaked during the week when Trump announced "reciprocal tariffs" and has since remained in a net outflow state. Bond selling began earlier in March and continues to this day. Despite a recent rise in U.S. asset prices, the continuous outflow of funds indicates that foreign investors remain reluctant to invest in U.S. assets.

In addition to ETF data, information from the global fund flow monitoring agency also confirms the trend reflected in the ETF data, showing a sudden halt in U.S. stock buying and even more aggressive selling of U.S. bonds. However, due to the broader investor base covered by this dataset, there are some differences in the conclusions drawn from the two datasets.

The current capital flow signals indicate that, at best, capital inflows into the U.S. are slowing rapidly, and at worst, there is a continuous active withdrawal from U.S. assets. Regardless of the interpretation, the dollar, as a 'twin deficit' currency, faces challenges.

The dollar index is on track to record its largest monthly decline since July of last year due to Trump's actions that have shaken confidence in the reliability of U.S. assets. Historical data dating back to the Nixon era suggests that the dollar index could set a record for the worst performance during a U.S. president's first 100 days in office in over half a century. From January 20 to April 25, the dollar index has cumulatively declined by nearly 9%, on pace to set the largest decline in the first 100 days of a president's term since 1973, the year Nixon began his second term. The dollar is expected to experience a second wave of weakness, describing it as a cyclical shift that will last for multiple quarters.

This week is packed with significant economic data releases. Many investors are closely watching the U.S. April non-farm payroll report, expected to show continued job growth, albeit at a slower pace than the previous month. Additionally, the U.S. will release first-quarter GDP data and the Federal Reserve's preferred inflation gauge, the core PCE price index. If more "hard data" begins to show signs of decline in the current context of collapsing "soft data" in the U.S., it could further fuel investors' willingness to sell U.S. assets. Recently, Federal Reserve officials, including Chairman Powell, have indicated a willingness to cut interest rates if economic growth risks become apparent. However, most officials currently seem more inclined to wait and see the impact of Trump's tariff policies on inflation and employment before taking action.