The key point to bear in mind here is that the US is a huge deficit country. It needs to suck in foreign savings to fund its yawning current account deficit. The last estimate of this financing need was the USD 226.4 bn current account deficit for Q3. If changes in the current and financial accounts of the balance of payments have any bearing on currencies at all, it is when there are discrepancies between the amount of capital the US needs and the amount that's supplied. Sometimes foreign investors want to send far too much cash to the US.

This observation formed the basis of the so-called ‘savings glut' pointed out by former Fed chair Bernanke twenty years ago. He highlighted the fact that foreign savers, many from emerging market countries, had been ploughing so much money into the US that it had caused US bond yields to decline even as the Fed hiked rates. But last year we saw what might have been termed a sort of reverse savings glut because the Fed eased yet longer-term yields failed to fall, and we also saw the US dollar decline despite a huge rise in global risk aversion in the early months of 2025, something that has traditionally caused dollar strength, not weakness. This being said, does it seem that what happened last year and earlier this year represented some sort of ‘buyers strike’ by foreign investors?

Not really. In general, apart from a wobble last year around the time of President Trump's tariff tantrum, capital flows to the US have remained solid. For instance, the last current account deficit for Q3 might have been in the red by USD226.4bn, but the financial account side of the balance of payments reveals that foreign lending to the US was over USD400bn at USD409.9bn.

Now admittedly, this data moves around a good deal and is heavily influenced by valuation effects, but the general point remains that the US did not seem to suffer deficient capital inflows last year, and yet the US dollar still fell by nearly 10% in trade-weighted terms. Put another way, it did not seem that foreign investors had to actively dispose of US assets to bring the US dollar down.

One explanation was that all investors had to do was to adjust hedges. Foreign investors seemingly hedged more of the open long-dollar positions that were being used to fund holdings of assets like US stocks and bonds, while at the same time, US holders of foreign assets reduced their hedges as they wanted to gain exposure to rising foreign currencies.

All this suggests that more of this hedging activity could keep the US dollar sliding even if foreign investors do not sell the underlying assets. However, Steven Barrow, Head of Standard Bank G10 Strategy, said there would be two caveats here.

The first is that the amount of capital the US requires could continue to decline as the trade balance shrinks because of tariffs. A second issue is that the hedging activity we saw last year might have left investors in a place where hedge ratios are better suited to the current situation. In fact, investors could have become too defensive, meaning foreign investors could reduce hedges this year to take on more US dollar exposure. But even these two issues might not be the end of the matter.

Another issue that we think could be important is that, while it is not necessary for foreign investors to scale back their holdings of US bonds and stocks to generate a fall in the US dollar, they could still sell. In other words, the hedging that we saw last year was more like an initial knee-jerk reaction by many investors to the tariff turmoil: rather than sell US bonds or stocks, they just hedged their US dollar exposure.

But in Steven Barrow’s view, now might be the time when a more fundamental and longer-lasting assessment of US investments has to be made. And if, as seems likely, the result is that foreign investors do decide that they should allocate less to the US (while US investors up their overseas holdings), the result should still be a weaker US dollar even if hedge rates are largely unchanged.