With the ongoing shifts in the markets, the U.S.’s reliance on foreign capital is reversing, leading to lower asset prices. However, its unique position as the issuer of the world’s reserve currency provides a significant advantage in navigating this shift, according to an expert.
What Happened: In a recent thread on X, Bob Elliot, co-founder, CEO, and CIO of Unlimited and former investment committee member of Bridgewater Associates, argued that, unlike typical emerging market balance of payments crises, the U.S. can prioritize domestic economic conditions due to its debt being denominated in U.S. dollars.
A balance of payments crisis in an emerging market can often trigger aggressive rate hikes to retain foreign capital, curb consumption, and limit currency depreciation needed to service foreign-currency debt, typically crushing local assets.
However, Elliot argues that the U.S. situation differs fundamentally despite sharing the characteristic of high reliance on foreign capital. Since U.S. debt is not issued in a foreign currency but in its own, “U.S. policymakers are in the privileged position to prioritize domestic conditions through the adjustment process,” said Elliot.
While concerns exist about foreign selling pushing rates higher, as seen in an emerging market crisis, the Fed’s ability to prioritize domestic conditions in the U.S. means it can ease monetary policy even as capital withdraws.
If needed, “the Fed can always print money and buy the bonds,” particularly to offset potential deflationary pressures from a weakening economy, said Elliot.
He explains that, unlike typical BoP crises, the Fed’s focus on domestic conditions, enabled by a weaker dollar and easing interest rates, can limit equity losses from reduced demand.
Why It Matters: According to Elliot, the selloff in U.S. assets is a consequence of the government’s efforts to reduce consumption through tariff policies and a subsequent narrowing of the current account deficit.
The decades-long buildup in foreign capital inflows since the 1990s, Elliot highlighted, was initially driven by reserve purchases and later by increased equity investments following the Global Financial Crisis. Also, foreign private investors funded substantial federal government deficits in recent years.
“Never would a country be allowed to run such a classic ‘twin deficit’ problem for so long,” Elliot stated, emphasizing the unprecedented nature of this forty-year dynamic, made possible by the dollar’s reserve currency status.
Thus, he argues that the dollar’s reserve status can help policymakers make “adjustments” without creating a typical balance of payments crisis.
Price Action: As of the publication of this article, the Dollar Index Spot was trading 0.16% lower at the 99.6890 level, and the futures of the Dow Jones, S&P 500, and Nasdaq 100 indices were down 0.49%,0.31%, and 0.39%, respectively.
The SPDR S&P 500 ETF Trust (NYSE:SPY) and Invesco QQQ Trust ETF (NASDAQ:QQQ), which track the S&P 500 index and Nasdaq 100 index, respectively, rose on Wednesday. The SPY was up 1.55% to $535.42, while the QQQ advanced 2.27% to $454.561, according to Benzinga Pro data.
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Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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