Foreign Capital Shifts to U.S. Stocks, Shuns U.S. Bonds: Deutsche Bank Warns Dollar's Safe-Haven Status Is Weakening

According to Marketwatch, the United States' technological edge continues to attract global capital into its stock market, but demand for U.S. Treasuries—long a pillar supporting the dollar—is gradually cooling. Deutsche Bank's latest report indicates that the U.S. is increasingly relying on foreign inflows into equities rather than bond purchases to meet funding needs, signaling a weakening of the dollar’s long-standing 'safe-haven' status anchored in the bond market, and raising future volatility risks.

Mallika Sachdeva, Deutsche Bank’s foreign exchange strategist, stated in a recent report that shifts in U.S. foreign policy are eroding global investor demand for U.S. Treasuries. At the same time, U.S. leadership in technology sectors such as artificial intelligence (AI) continues to draw substantial international capital into U.S. stocks, creating two opposing forces.

Sachdeva noted that equity capital flows are typically short-term and highly volatile, whereas bond flows are relatively long-term and stable. Currently, the amount of capital the U.S. receives from foreign equity inflows has already surpassed that from foreign purchases of U.S. Treasuries, indicating a growing reliance on equity funding.

Historically, during global recessions or financial market turmoil, capital would flow into U.S. Treasuries, lowering yields and supporting the dollar’s strength. As a result, overseas investors holding U.S. Treasuries rarely needed currency hedging. However, as global demand for U.S. debt declines, this long-standing mechanism supporting the dollar is gradually changing.

Sachdeva also pointed out that Europe’s recent push for 'Strategic Autonomy'—increasing defense and energy spending—could lead to the reallocation of funds previously held in dollar-denominated assets, further reducing exposure to dollar assets.

Additionally, deteriorating U.S. public finances, with national debt approaching $40 trillion, contrast with robust corporate earnings growth, making equities more attractive than bonds to investors and driving more international capital into U.S. stocks.

Deutsche Bank noted that rising accessibility for overseas retail investors to U.S. equities is further boosting inflows. The report highlights that South Korean retail investors are consistently increasing their U.S. stock holdings, while Japanese investors benefit from the Nippon Individual Savings Account (NISA) system, making it easier to invest in overseas equity markets.

Following meetings with clients in the U.S. and Asia, Sachdeva observed that American investors are optimistic about the development of AI and blockchain technologies. In particular, the widespread adoption of stablecoins and asset tokenization could attract more global capital into the dollar system, potentially becoming a new pillar supporting the dollar.

However, Asian investors believe that progress in China’s efforts to internationalize the yuan has not yet been fully reflected in markets. Deutsche Bank noted that China is steadily enhancing the yuan’s role in the global financial system by expanding yuan-denominated capital markets and increasing cross-border yuan usage.

Beyond shifting capital flows, Deutsche Bank also warned that undervalued Asian currencies could pose another medium- to long-term challenge to the dollar. According to the bank’s proprietary valuation model, six of the ten most undervalued currencies globally are from Asia, including the yen, yuan, Indian rupee, and Korean won. The bank warned that if these currencies undergo valuation corrections in the future, the impact on the dollar could be greater than currently anticipated by markets.