Since 2008, the negative balance of the US net international investment position has grown to an alarming $26 trillion. The US administration’s policy has initiated a reverse process, allowing the EURUSD pair to have room for growth. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Donald Trump wants to tax investments.
- The US dollar’s strength is directly linked to the performance of equities.
- Capital outflows are causing the USD index to fall.
- Long trades are relevant as the EURUSD pair is trading above 1.133.
Weekly US Dollar Fundamental Forecast
The US continues to make decisions that will have long-term negative consequences for the country. According to Bloomberg, Donald Trump is urging Republicans to pass his “Big, Beautiful Bill.” It includes a provision on levying fees on investments in the US by non-residents whose countries impose one or more “unfair foreign taxes” against the US. This will accelerate the return of capital to Europe and Asia, allowing the EURUSD pair to continue its rally.
Over the past three decades, demand for the US dollar has increased, and its exchange rate has strengthened because US stocks have consistently outperformed their foreign counterparts. However, a notable exception emerged between 2002 and 2008, when stock indices outside the US demonstrated stronger performance compared to the S&P 500, while the USD index experienced a decline.
US Dollar Performance and US Stocks vs. Non-US Equity Markets
Source: Bloomberg.
A similar situation is currently unfolding. The EuroStoxx 600 is 19 percentage points higher than the broad US stock index in dollar terms, and the weakness of the greenback has become a common topic of discussion.
Notably, capital outflows to the US, which began with the global economic crisis of 2008 and accelerated during the pandemic, have led to a significant negative balance of $26 trillion between US investments abroad and foreign investments in the US. The scope of capital repatriation is truly remarkable, as is the extent to which the US dollar may weaken.
Net International Investment Position in US, Germany, and Japan
Source: Bloomberg.
Against this backdrop, Donald Trump has decided to impose taxes on non-residents who invest in US stocks and bonds. According to a bill recently submitted to Congress, the Treasury Department will designate countries that impose discriminatory fees, such as the EU’s digital services tax, on a quarterly basis. As a result, the US will be in a position to impose a 5% duty, and the final figure could rise to 20%. Will this lead to an acceleration in capital flight from the United States? In my professional view, the answer is unequivocally a resounding “yes.”
The US dollar is one concern, but the entire US economy could suffer as a result. Large-scale purchases of Treasuries by non-residents have led to a decline in their yields, which has simultaneously lowered interest rates on bank loans, including mortgages. Higher yields will likely result in increased spending on debt servicing and reduced spending on goods and services for households and businesses. This will slow GDP growth and hinder employment growth.
Weekly EURUSD Trading Plan
The decline in American exceptionalism has already led to a 9% slump in the USD index since the start of the year. Donald Trump’s recent proposals are likely to continue driving the rally in the EURUSD pair despite the current economic challenges in the eurozone and the European Central Bank’s monetary policy easing cycle. While the euro is trading above 1.133, long trades will present a lucrative opportunity for traders.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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