BNY's Geoff Yu notes that despite major supply shocks in 2022–2023, private capital flows into United States (US) assets, including Treasuries and equities, remained resilient even as APAC (Asia-Pacific) and European trade surpluses declined. The report argues that the US Dollar (USD) could come under pressure only if semiconductor-related supply constraints curb private inflows, with limited offset from official flows while global trade surpluses stay subdued.

Private inflows still support Dollar

"During rounds of immediate risk-off from a supply shock, reserve managers’ aggressive FX sales may support the dollar due to currency rebalancing. But as dollar-denominated assets such as U.S. Treasurys face swift liquidation, there could be a direct adverse effect on U.S. asset prices. Additional factors – such as tighter financial conditions from higher yields – will also pressure U.S. equity markets, and a prolonged decline in surpluses normally recycled back into the U.S. would compound that challenge."

"While liquidity stress was pronounced during the most extreme weeks of the pandemic, based on Treasury International Capital figures, the U.S. did not face massive liquidation flow in 2022. Returns in 2021 were weaker, perhaps because the world was reopening – making risk-reward attractive for portfolio accounts in markets and asset classes seen as benefiting from reopening “earlier” than the U.S. Private flows were consistently strong into the U.S. from 2021 onwards, and the 2022 supply shock – when APAC and European surpluses declined – did not impact capital recycling into the U.S. from external savings."

"In hindsight, while the quantum of global surpluses remained high, they simply shifted from APAC/Europe to petro-producers – yet flows ended up in the U.S. either way, as its asset markets continued to offer the strongest performance."

"However, one constraint could derail the base case of tech/AI-led U.S. outperformance case – an acute shortage of specific goods required for semiconductor production, driven by supply-chain and logistics disruptions. If realized, the dollar could face significant pressure as private capital inflows ease, with no offsetting official flows while trade surpluses remain subdued."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)