Global Capital Exodus: A New Chapter in the US Dollar's Decline

The US dollar's recent downturn is marked by more than just fluctuating interest rate expectations; a significant shift in global capital is now the main driving force, as highlighted by a Union Bank of India report. Investors are increasingly diverting funds away from US assets, signaling a fundamental change.

The Union Bank report indicates that without decisive action from the Federal Reserve or a noticeable uptick in US economic growth, the dollar's weakness could persist. The preference for non-US fixed-income assets weighs on the dollar index (DXY), exacerbated by recent dovish Federal Reserve comments promoting stable or lower interest rates.

Historically, capital continued to flow into U.S. equities and bonds despite the dollar's faltering performance in early 2023. However, a growing shift in capital flows and domestic factors now overshadow global interest rate trends, suggesting that the dollar's future trajectory is increasingly tied to internal economic conditions.

(With inputs from agencies.)