FX.co ★ US dollar propped up by blockchain and private capital

The long-term outlook for the American currency is being fundamentally reshaped by geopolitics, new technologies, and shifts in global capital flows. As analysts note, investors should forget the dollar’s traditional drivers and pay attention to how Washington now finances its external deficit.

The main structural shift is the decline in demand for US government debt from official foreign institutions, frightened by rising geopolitical tensions. That gap is being filled by global investors who are pouring equity capital en masse into the US tech sector. Experts say that the divergence between falling official purchases of debt securities and rising private equity investments has reached a historic record. As a result, the US dollar is increasingly dependent on fickle, risk-sensitive capital, losing its support from traditional reserve demand.

Two contrasting trends are now taking shape globally. On the US West Coast, blockchain and tokenization have become key themes for investors, capable of eliminating barriers to buying American assets. At the same time, in Asia, the focus is on China’s efforts to internationalize the yuan — a trend Western markets continue to stubbornly underestimate. Both forces are bound to reshape global capital flows in the years ahead.

Most of the world’s undervalued currencies are concentrated in Asia. Deutsche Bank notes that six of the ten cheapest currencies globally, including those of large industrial economies, are in Asian countries. With growing pressure from Europe, Beijing is expected to keep setting the tone in local currency markets. The main regional wildcard remains Japan, where investors are closely watching how the yen will react to the authorities’ budgetary and industrial agenda.